China on Credit
	The Iron Rice Bowl Goes Plastic
	By Nellie Huang

Posted Monday, May 9, 2005; 20:00 HKT
Na Qiao, a 26-year-old Shanghai advertising account manager, has heard old proverbs like "Free from debt is free from care" and "A good debt is not as good as no debt" since she was a girl—maxims she cheerfully ignores now that she's an adult with a $20,000 annual salary. Na recently financed her purchase of a $17,500 car (the down payment was 10%) and she says she uses her China Merchants Bank MasterCard "everywhere—at convenience stores, grocery stores, department stores, even when I go to bars."

The Confucian value of thrift may be deeply rooted in Chinese culture, but Na's generation is learning to live by a new proverb: "Buy now, pay later." Last year, American Express, Citigroup and HSBC all launched their first credit-card programs in mainland China, while GMAC, the financing arm of General Motors, set up shop in Shanghai, becoming the first foreign auto-finance firm in the country. These companies are salivating at the prospect of introducing the joys of borrowing to what MasterCard reckons is an emerging demographic of 45 million-60 million increasingly affluent Chinese households. So far, they've made barely a dent in this alluring market: of the 668 million cards circulating in the mainland today, only 5 million are true revolving credit cards, the kind that allow consumers to pay off purchases over time. The rest are mostly debit cards—essentially glorified ATM cards. Given this void, "the potential for consumer-credit growth is massive," says Christian Weidemann, chief of GMAC's China operations.

Still, China has a long way to go before it mutates into a nation of carefree, Western-style borrowers. Even in a sophisticated international city like Shanghai, most people have little experience of managing personal debt—and that presents a risk to borrowers and lenders alike. "When you look at the growth of credit in any country, you have to look at the culture," says Alex Boorman, an analyst with Datamonitor, a London-based market-research firm. "Not having had access to credit previously means there will be hurdles. You have to make it clear that loans must be paid off and there will be penalties if they aren't." Last year, a car-buying binge in China was soon followed by a wave of defaults. Although reliable statistics of the phenomenon are hard to come by, the information office of China's State Council reported that as of mid-2004, more than half of all auto loans in the mainland were in default. (In the U.S., about one out of 50 car buyers stop loan payments.)

Consumer-credit companies and the Chinese government are trying to avoid the mistakes South Korea made. To kick-start domestic consumption in the late 1990s, Seoul began encouraging credit-card use by offering tax deductions for purchases made with plastic. Thousands of South Koreans went on a borrowing binge, only to get in over their heads. Several of the country's largest card companies had to be restructured when loans totaling more than $2.5 billion soured and the economy slumped. Boorman warns: "There is the opportunity for something similar to happen [in China] if decent credit-checking procedures are not put in place."

Working with Chinese banks, companies like MasterCard are hoping to do just that. "From risk control to collateral, we're trying to bring the best practices of Western society to China," says Willie Fung, MasterCard's Greater China general manager. The firm has also collaborated with banks and newspapers to raise public awareness about consumer debt, and offers training in personal financial management to college students.

But it could still take many years for the credit-card culture to displace the Confucian aversion to debt. Fung says the average outstanding balance of revolving credit cards in China today is only $111. By contrast, the average U.S. household carries $7,519 in revolving debt. "People are somewhat cautious" on the mainland, he says. Even Na Qiao, the Shanghai ad exec, pays off her balance in full every month. "In China," she says, "there is still a saying: if you don't have the money, don't spend it."

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