Why China should play its cards right

The push for fi­nan­cial re­form in the coun­try will lead to a freer mar­ket

China Daily (Hong Kong) - - BUSINESS COMPANIES - By TODD BALA­ZOVIC tod­dbal­a­zovic@chi­nadaily.com.cn

As China’s con­sumer spend­ing con­tin­ues to grow, fi­nan­cial in­sti­tu­tions must be given lee­way to ad­just credit card in­ter­est rates to re­main com­pet­i­tive, says Ling Hai, Master­Card’s divi­sion pres­i­dent for China.

With credit card in­ter­est rates locked in at 18.25 per­cent, Ling, who was a guest speaker at the re­cent Young Lead­ers’ Fo­rum in Bei­jing, says static rates lead banks to of­fer credit only to those with the best credit scores, which is a lim­ited num­ber con­sid­er­ing the Chi­nese only be­gan us­ing credit en masse in the past decade.

“There are a lot of peo­ple in China who have no credit his­tory, so how do you make a lend­ing de­ci­sion?” Ling says.

“Banks can’t re­ally do riskbased pricing, so what they end up do­ing is go­ing af­ter only the very credit-wor­thy, the good credit cus­tomers.

“If some­one has no credit his­tory, or a poor credit his­tory, the banks want to take them, but they want to charge 25 per­cent. They can’t do that right now.”

Ling says the young gen­er­a­tion of Chi­nese marks a big change in the way the na­tion views spend­ing on credit.

“For my par­ents’ gen­er­a­tion, bor­row­ing money was al­most a crime. My gen­er­a­tion is al­ready dif­fer­ent,” the 43-yearold Shang­hai-na­tive says, as he takes his wal­let from the side pocket of his suit jacket.

Of­fer­ing a brief glance at the con­tents, he flashes a hand­ful of credit cards — all bear­ing the Master­Card logo — be­fore con­tin­u­ing.

“Then if you look at the peo­ple born in the 1980s or 90s, they have this tremen­dous op­ti­mism about the fu­ture. They be­lieve they’re go­ing to make more money, have bet­ter jobs, more in­come and more wealth.”

An­i­mated and wear­ing an un­shak­able smile, Ling ap­pears to share such op­ti­mism.

The use of credit cards is a fairly re­cent phe­nom­e­non in China. Very few credit cards were is­sued in the early 1990s but, by the end of 2012, more than 318 mil­lion were in use, ac­cord­ing to the Peo­ple’s Bank of China.

That’s a big num­ber for any coun­try but, with 1.4 bil­lion peo­ple, China is a very un­der­pen­e­trated mar­ket, Ling says.

“By com­par­i­son, the US has about 300 mil­lion peo­ple but the num­ber of credit cards is­sued is more than 1 bil­lion.

“China is still a very un­der­lever­aged society. Peo­ple hardly bor­row any­thing.”

With an MBA from the Univer­sity of Chicago Booth School of Busi­ness, Ling ob­served first­hand the US’ affin­ity for pur­chas­ing on credit.

While the op­ti­mistic mind­set among younger Chi­nese is great for credit card com­pa­nies, there should also be a note of cau­tion, he says. “You have to strike the right bal­ance in terms of debt.”

But for for­eign fi­nanc­ing com­pa­nies aim­ing to take a cut of China’s new­found will­ing­ness to spend on credit, the fo­cus is on strik­ing the right bal­ance with reg­u­la­tors.

Re­stric­tions on for­eign fi­nan­cial in­sti­tu­tions op­er­at­ing in China have lim­ited com­pa­nies such as Master­Card, Visa and Amer­i­can Ex­press to process cross-bor­der trans­ac­tions, pur­chases made with Chi­nese cards over­seas, via dual logo part­ner­ships with China’s only do­mes­tic bank card net­work, UnionPay.

Be­fore work­ing at Master­Card, Ling played a cru­cial role in help­ing to es­tab­lish such co­branded cards while work­ing for Pa­cific Credit Card Cen­ter, a joint venture be­tween HSBC and China’s Bank of Com­mu­ni­ca­tions.

While seven or eight years ago, sim­ply be­ing able to bring a card that worked with Chi­nese banks to process pay­ments out­side China was a step in the right di­rec­tion, Ling be­lieves big­ger changes are afoot.

“Based on the re­cent frame­work from the Third Plenum, I think China is def­i­nitely mov­ing in the right di­rec­tion. That is, more open­ing, deep­en­ing re­forms and also al­low­ing a level play­ing field for both do­mes­tic and for­eign com­pa­nies, State-owned en­ter­prises and pri­vate ones,” he says.

With much of his time spent work­ing closely with Chi­nese in­dus­try reg­u­la­tors, Ling be­lieves the right mind­set is in place to see an open­ing-up of China’s do­mes­tic bankcard mar­ket.

“China sees com­pe­ti­tion as good. They un­der­stand that com­pe­ti­tion is what fos­ters in­no­va­tion and al­lows bet­ter goods and ser­vices to be pro­vided for peo­ple at a much lower cost.

“The mar­ket is re­ally at the cusp of open­ing in terms of do­mes­tic op­por­tu­nity; it’s just not clear what the tim­ing will look like. So I think we will just have to be pa­tient.”

Al­ready there have been signs of an at­ti­tude shift with US-based Citibank be­ing given the green light to is­sue its first sin­gle-branded cards in China in April.

Com­mer­cial fo­cal points cre­ated by ur­ban­iza­tion are also help­ing to set the stage for for­eign fi­nance ser­vice com­pa­nies’ first big moves into China.

China’s pop­u­la­tion shift from ru­ral vil­lages to big cities is help­ing to cre­ate an en­vi­ron­ment from which fi­nan­cial ser­vices can ef­fec­tively map out plans to ex­pand, Ling says.

“If you look at ru­ral ar­eas, ev­ery­thing is spread out. There’s no scale ef­fect to build com­merce and there­fore there’s no scale ef­fect to take elec­tronic pay­ments.

“But with ur­ban­iza­tion you have the con­cen­tra­tion of mer­chants, you have the scale and cost ef­fi­ciency to build elec­tronic pay­ment ac­cep­tance.

“More peo­ple will have jobs, bet­ter in­comes and more wealth. There­fore they will be­come more credit- wor­thy for the banks to lend to them and is­sue credit cards.”

Get­ting ac­cess to cap­i­tal, whether for a per­son or a small or medium-sized en­ter­prise, will be the driv­ing force be­hind China’s fu­ture eco­nomic in­no­va­tion, he says.

“To suc­ceed or flour­ish, busi­nesses must meet con­sumers’ un-met needs,” he says. “Tra­di­tion­ally, busi­nesses have had more lever­age but, in the near fu­ture, con­sumers are go­ing to be the ones with lever­age.”

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