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The Downside of Easy Credit

Source: Far Eastern Economic Review, (Issue cover-date, March 6 2003), February 28 2003

Citibank's chances of making money on credit cards in China depend on its ability to convince wealthy Chinese to use plastic, right? Well, it's a little more complicated than that.

Look at Hong Kong, where there are plenty of credit cards--and, most would argue, an established credit culture.

In Hong Kong this month, bank after bank reported big losses in the second half of 2002 from increasing credit-card defaults, led by Bank of East Asia, whose HK$355 million ($45.5 million) write-off suggested 19% of its cardholders had stopped servicing their credit-card debts.

It's not just dud economies, either: In South Korea, a card-issuing binge in recent years has left Korean banks exposed when newly minted borrowers started skipping their repayments. Most of the country's big banks were forced into large write-offs in the final quarter of 2002, some slipping into the red. Korean card delinquencies topped 10% last year; Hong Kong's are above 13%.

That's a cautionary note for Citibank as it plots its push into China's infant credit-card market. Its success won't be just a question of getting Chinese to use plastic--it'll also be a question of getting them not to use it too much.

When Citibank's joint venture with Shanghai Pudong Development Bank starts rolling out credit cards in the latter part of 2003, this will still be an infant industry in China. Today, there are only around 1 million pure credit cards in the country. (There are nearly 500 million debit cards, but very few have credit options.) Only a tiny fraction of the country's merchants accept them: MasterCard spent a year lobbying the company that holds the Starbucks franchise in Beijing, and still only 17 out of the 35 outlets in the city take its cards.

But over the coming years, China's banks are likely to roll out their own credit products as they prepare for the opening of China's banking market. And if, as in Hong Kong and South Korea, borrowers start receiving and then using multiple cards, then the quality of Citibank's card portfolio could end up only as good as that of its competitors. And its competitors--mostly Chinese banks--don't have a stellar record with either assessing or managing risk.

To see why aggressive competition would be worrying, look at Hong Kong. "I could very easily get four cards with exactly the same credit line," says Willie Fung, MasterCard's China country head. "If everything goes right, I pay my bills, keep my credit history good, I continue to increase my credit line four times." That works until the price of investment assets like stocks and property starts falling, or people start losing their jobs, at which point Fung says borrowers reach the "tip-over point," where they can't afford to pay their bills.

That'll be a while coming in China. "Going from a debit culture to a credit culture, you don't see defaults at the beginning," says Albert Shiung, Visa's China country manager. "When consumers begin the switch to credit, their behaviour is to pay their bills every month."

Indeed, the vast majority of Chinese with credit cards shy away from rolling over debt. Xiang Wei, a Shanghai coffee-shop owner, has a debit card from Industrial and Commercial Bank of China with an overdraft capacity that lets him borrow above the amount in his bank account. He's never used the overdraft. Like many in the wealthy city, he says he wants to keep his credit record clean so he can borrow in the future to expand his business. (This means, of course, that ICBC makes no interest income from Xiang's card.)

But picture the day--almost certainly not far in the future--when Chinese banks are flogging their own credit cards to compete with the growing Citibank threat. At that point, Citibank may well have exposed its bottom line to the credit-assessment practices of Chinese banks and--through its cardholders' household finances--to the rise and fall of asset prices like Chinese stocks and property.

It's tempting to ponder the prospect of tens of millions of people yearning to charge it, but the risks certainly give one pause.