chinacreditcard2.jpgChinese consumers are obeying their government's exhortations to spend more and increasingly they are doing so using plastic.

In 2008, the number of credit and debit cards in circulation in China grew 20% to reach 1.7bn cards, the lion's share being credit cards. The number and value of transactions conducted using plastic money grew even faster by 55% and 70.5% respectively.

In the west, this tendency to live today and pay for it tomorrow arguably sowed the seeds for last year's global financial crisis, but China which last year saw its GDP growth shrink below 10% for the first time in six years, sees easy credit as the lesser of two evils.

China's domestic banks, majority-controlled by the state, have been quick to act on the government's new Carpe Diem policy.

For example, ICBC, the country's biggest bank, loaned 646bn yuan in Q1 2009, a rise of 458bn yuan over the same period of last year. Much of that increased lending went to businesses, but domestic personal loans rose by 52.5bn yuan, nearly 24bn yuan more than that in the same period last year.

Surprisingly, the explosion in credit issuance at ICBC has not come at the expense of credit quality. Indeed, ICBC boasted that at the end of Q1 2009, it had seen declines in both the amount and ratio of non-performing loans. No wonder so many western banks are desperate to get a foothold in China's still tightly-controlled retail banking market.

Nevertheless, the central bank has just warned of the risks of lax credit, after its figures showed that the level of credit card debt more than six months overdue rose 133% in Q1. Some banks have already decided to play safe by refusing credit card applications from high-risk groups like students.

Although a few foreign banks, such as HSBC's Hang Seng Bank, have been authorised to issue yuan-denominated debit cards, they are not yet allowed to issue credit cards, which is the largest and most succulent part of the pie.

Zigor Aldama, a young Spanish journalist based in China, recently wrote an interesting piece in Spanish newspaper El Diario Vasco on the contrasts between Chinese banks, which are falling over themselves to issue plastic cards, and their western counterparts, which in the recession have had to severely restrict credit to consumers and businesses.

In China, he notes, the government is desperate to boost domestic demand to compensate the loss of export revenues due to the global recession — exports previously contributed 55% of GDP.

It thus needs to encourage consumers to save less and spend more, and credit cards are seen as a perfect tool to achieve that goal, particularly as their penetration in mainland China is much less than in HK or Taiwan, the closest countries culturally to the PRC.

A few years back, credit cards were only used by wealthy city dwellers in China, but Aldama notes that young people have quickly woke up to their role as a status symbol, as indispensable today as a mobile phone or brand-name clothes.

A sociologist told Aldama that many parents get a credit card for their child — and being China, its usually a single child, of course. Even if the child has no real need for a card, the parents fearful of being seen to be behind the times, will get him or her a credit card “just in case.”

As of March 31, Chinese banks had issued more than 150m credit cards, up nearly 43% year on year. But Chinese consumers still have relatively few credit cards — just one for every nine people — compared with more than four cards per person in the US and 0.95 in Brazil.

Technorati : , , ,