A Peak Inside the Chinese Credit Card Industry


You may think it’s cruel when your credit card issuer charges you a late fee or an over-the-limit penalty, but imagine if your name was printed in the paper for all to see if you failed to pay your bills on time.

And if that’s not enough for you, picture being hauled to jail for five years for defaulting on as little as $3,000 in debt.

Well, that type of extreme action seems to be a reality in China, a nation of roughly 1.3 billion with just about 100 million credit cards in circulation.

While that number is low, consider the fact that in 2003, just three million credit cards were in use in the emerging country.

Analysts believe within the next decade, China could issue one billion new credit cards, many to consumers who never before experienced the power of plastic.

In China, the credit card industry is still very archaic, according to a recent report from the LA Times.

Because the country doesn’t yet have a sophisticated scoring model such as the Fico score we have here in the U.S., thousands of workers must process applications by hand to determine credit risk.

And it seems to be working, at least for now, with charge-offs at leading Chinese lenders less than half the six percent rate seen domestically.

But as new, young spenders get their hands on credit cards, that all may change, as evidenced by the loan-loss ratio at China Merchants Bank, which has risen from 0.67 percent in 2005 to an estimated 1.6 percent this year.

Per the article, the average Chinese credit cardholder has no more than two cards, compared to five for U.S. consumers, and more than 70 percent pay their balance in full each month.

It should be interesting to see how things shape out in the growing country, if they adopt a credit score model like ours here, and how they manage the growing credit culture.

Let’s just hope they don’t use the United States and the rest of the western world as a model.

Special note: A knowledgeable reader who has spent more than a decade living in China has clarified some of the facts presented in the original LA Times article.

He noted that there is in fact a national credit reporting bureau run by the Chinese Central Bank (People’s Bank of China), which he believes is both more robust and secure than the system found in the United States.

However, the Central bank does not issue a credit score, though individual banks use a credit scoring system similar to that in practice here in the states that is not divulged to the general public.

Additionally, he noted that it is not a criminal offense to be unable to pay one’s credit card, and those cited in the article probably defrauded the banks and card issuers, which resulted in their names being publicized by the press.

(photo: philou.cn)

By Colin Robertson

Colin created this blog after spending several years in a job that required him to scour credit reports on a daily basis. His goal is to help individuals better understand their credit and get the most out of credit cards.

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