China is Following in US’s Credit Card Footsteps (And That’s Not Necessarily a Good Thing)
It’s an indelible image: the show of force China put on during the opening ceremonies of the 2008 Beijing Olympics. The coordinated pounding of drums by the country’s citizens heralded the rise of a new world power, and even the much-discussed smog belied the widespread infrastructure build-up taking place in the country. But did China get ahead of itself? Did modernization outrun the preparedness of the country’s citizenry, and could that even be its downfall? Quite possibly, if the country’s initial foray into widespread credit card use is any indicator.
A new study from researchers at the University of Missouri details the rise of the credit card in China after government officials began allowing foreign banks to offer plastic to its citizens as part of an overall effort to compete on a global economic stage. What resulted was a 40% increase in credit card use each year from 2004 to 2009, leading to the current environment in which 30% of urban Chinese households now boast at least one credit card.
So, what’s the problem? Well, it seems to be a clear-cut case of too much too soon. The country was inundated with credit cards before a proper knowledge base was established to ensure that people would use them responsibly. For example, 90% of those in China aren’t aware of the risks associated with credit cards before using them, and 60% don’t know the consequences of defaulting on debt, according to researchers.
It’s especially problematic that credit card debt and delinquencies are both on the rise in China. According to the most recent data available, Chinese credit card debt rose 130% in 2009, reaching $838 million, and the number of Chinese citizens with credit card debt that is more than two-months’ delinquent increased 133% in the first six months of the year. In China, you face criminal prosecution if you don’t square debts within three months of receiving your second past-due notification letter.
“Excessive debt loads can threaten the financial security of individuals and their families,” Rui Yao, an assistant professor of personal financial planning at the University of Missouri and one of the researchers who conducted the aforementioned study, explained in an e-mail. “One previous study reported a retiree cut up his adult son’s seven credit cards when he learned that his son had amassed credit card debt that he could not repay. The father used most of his life savings to reduce his son’s credit card bill by about half. Situations such as this underscore the critical importance of consumer credit education, especially as China’s vast population and credit card marketers are expected to make China the world’s largest credit card market by 2020, less than a decade from now.”
We in the United States know all too well the dangers of credit card misuse, as widespread consumer overleveraging was undoubtedly a contributing factor to the Great Recession. As income tied to the housing market – either directly or tangentially – dried up, risky borrowing and pervasive overleveraging finally caught up with us and we found ourselves consumed by growing balances and no longer able to even make those minimum payments that allowed us to squeak by for so long. Yao says that this history lesson should be a cause for concern in China and could, in fact, serve as a roadmap for how to avoid disaster.
“Credit and debt are relatively new concepts to the Chinese culture,” she wrote. “Chinese consumers are in an unchartered credit territory. China certainly should learn lessons from our failure, and consumer education on debt management is needed to avoid unnecessary mistakes.”
However, as we’ve all learned – especially in the last few years – just because something is needed, doesn’t mean that it will get done right away. The good news is that China seems to be learning from some of our mistakes and is already taking certain steps to protect consumers. In fact, these steps look a lot like those we took in order to boost consumer rights as the nation emerged from the Great Recession.
“Chinese officials are aware of the potential of credit card misuse and have been making efforts to protect the disadvantaged,” Yao wrote. “In July 2009, concerned about rising credit delinquency, the China Banking Regulatory Commission demanded that banks not offer gifts to new credit card holders, set sales quotas or issue cards to persons under age 18.”
Sounds a lot like what the CARD Act did to prompt change in the way credit cards are marketed to young people, doesn’t it? Well, credit card marketers in the US are finding creative ways to incentivize the use of their products by young people anyway, so we’ll have to see what effect the new rules will have in China and whether people can get up to speed on the do’s and don’ts of credit card use quickly enough to avoid serious complications.