Credit Card Market in China.

¶ … credit card market in China. Through the use of introduction, discussion a literature review and a methodology section the writer presents a proposal for testing the future of the credit card market in China. There were 20 sources used to complete this paper.

Credit has been used in many nations for many years, but in China the concept of credit is relatively new. The Chinese credit card market is one that is currently underway and being implemented but still young enough that there are questions as to its stability and future potential within the current Chinese economic system. One of the problems with the credit card market in China is the poor service that it provides. The service is substandard when compared to the counterparts its neighbors across the world provide to their customers and this poor service translates into companies not wanting to do business with credit card holders who obtain China backed credit cards.

According to Chinese law, foreign banks are not allowed to do personal Renminbi business in China. But China promised to open the sector to foreign banks in 2006 when it entered the WTO (Banks, 2004).

Meanwhile, Chinese banks, with comparatively poor international networks and inferior service, need overseas counterparts to help them with credit card promotion (Banks, 2004). Experts have noted that the credit card market will become the next key sector for cooperation between Chinese and foreign banks. "The contribution of Citibank, the largest credit card issuer and financial institute in the world, will ensure our customers get the best services and banking products," said Jin Yun, president of the SPDB (Banks, 2004)."

Currently the government of China is encouraging credit card use and there are more than one million residents out of the three billion residents in China who currently use credit cards.

With a population exceeding 1.2 billion and a 2003 GDP of $1.414 trillion, China is one of the world's largest economies and an attractive market for global credit card companies seeking new growth opportunities. As the Chinese government continues to improve the country's financial system in an effort to implement its WTO commitments, global credit card issuers are increasing their efforts, becoming early movers in the green field Chinese credit card market (Chinese, 2004). "

There are still many challenges to overcome when it comes to a credit card market in China. It is important to determine the best avenue to take in building this market for the market grown and continue to gain strength.

Literature review

One of the problems with the Chinese credit card market as compared to markets in the western world is the fact that China has a financial system that does not easily comply with credit card market elements (Flexible, 2003). Flexible cards are a common feature in other areas of the world, but for China the concept is struggling to fit in with the current economic policy that was adopted in the late 1970's.

When one compares the credit card usage in China to that in the United States it is easy to see that the credit card market in China is still struggling to take hold and gain its footing. According to recent research there are 193 million adults in the United States, and 124 million of them have at least one credit card.

While it is important to grow the credit card market in China it is equally important to do so responsibly and carefully to minimize risk and loss to financial institutions willing to enter that market.

Around the world, bank card fraud losses to Visa and MasterCard alone have increased from $110 million in 1980 to an estimated $1.63 billion in 1995.(4) the United States has suffered the bulk of these losses - approximately $875 million for 1995 alone. This is not surprising because 71% of all worldwide revolving credit cards in circulation were issued in this country (for a complete index of this report click on (http://www.researchandmarkets.com/reports/1729)."

The concern of financial experts when it comes to the possibility of a credit card market in China is the Chinese economic policy and financial system that is currently in place (Hill, 2005). Currently China is at odds with the western world because of its insistence on artificially fixing its exchange rate against the American dollar. The trade war that threatens to explode places concerns experts who analyze the growing market for credit cards in China. Because China artificially fixes its exchange rate against the western dollar the market for credit cards is quite volatile.

The world's largest credit union VISA issued its latest survey on October 18, showing that last year Chinese spent an average of USD253 in a single credit card transaction, the highest in the world (Chinese, 2004). "

Research shows that credit cards are a growing reality in China already.

Bank of China, the oldest indigenous Chinese bank, now issues a Great Wall platinum Visa credit card, and it comes with a frequent-flier rewards program. Today, only about 1% of Chinese citizens hold Western-style credit cards, and they tend to be the wealthiest of urban sophisticates. A majority of people use cash for all transactions; either they do not have bank accounts or they have never been offered credit by a bank. What little personal lending occurs in China usually consists of informal arrangements among friends, family members or business associates. But major changes are taking shape, and conditions in China have grown ripe enough to attract investments from the world's biggest credit card issuers in the past year (Kingson, 2004)."

Current economic policy forbids foreign banks or institutions from offering credit or loans or services directly to Chinese residents. The are barred from making the offer but that is soon going to change. In 2007 the market will open wide when that ban is lifted and foreign institutions can begin to offer credit cards to Chinese residents. Given the problems with China's current level of service within the credit card market it has already developed it is important to research how well received a foreign credit card market will be (Kingson, 2004). It will be important to determine whether consumers would be more willing to use and have a credit card if the market was opened to foreign investors that may provide a higher standard and quality of service than the Chinese market currently provides (Kingson, 2004).

Also on the horizon are the Olympics in Beijing in 2008, which will bring large numbers of plastic-carrying visitors. Anticipating a burst of activity, companies that process payments and sell card-swipe terminals have been busy setting up shop. "It's a nascent business which is really beginning to explode (Kingson, 2004)," said Jim Allhusen, executive vice president and general manager of Visa International for China and the Philippines. "Consumers want your products; banks want to get into the market." Numbers may still be small, but hopes are high (Kingson, 2004). At the end of June, there were 704 million bank cards in circulation in China, 650 million of which were debit cards, used primarily to withdraw cash from teller machines, according to Asian Banker, a Singapore-based research company that tracks the financial services industry. Only seven million were what Westerners consider to be credit cards, offering an unsecured line of credit, Asian Banker said. Most of the others were lines of credit secured by bank deposits (Kingson, 2004). On the supply side, only 2% of merchants were equipped to handle card transactions, though the number in some cities was much higher - in Shanghai, for example, it was 30%. But momentum is building rapidly, in part because the Chinese government has gradually been relaxing restrictions on domestic banks and in part because lenders view China's growing middle class as an attractive customer base (Kingson, 2004)."

With the first credit card in China being only 20 years old the market is still young and being developed which creates an entire new realm of possibilities as the market gets grown.

China's state-owned commercial banks have recently begun issuing a dual-currency card because the local currency, the yuan, which is also called the renminbi, cannot be exchanged for other currencies. Cardholders can use the dual cards within China to buy items in yuan and outside the country to buy things in dollars. For the moment, foreign banks can participate only from the sidelines, giving their Chinese banking partners expertise in running credit card operations - managing risks, marketing products, and handling customer service, for example. Several lenders have already made their aspirations clear (Kingson, 2004). The Citibank division of Citigroup spent $67 million last year for a 5% stake in its partner bank, Shanghai Pudong Development Bank, and it has options to increase its ownership to 24.9%. In February, the companies introduced two Visa cards, including a gold one that comes with Citibank World Privileges, a discount program.American Express teamed up with Industrial & Commercial Bank of China in March, and HSBC, based in Britain, has card-issuing arrangements with both Bank of Communications and Bank of Shanghai and has equity positions in them (Kingson, 2004). Other credit card issuers are proceeding more cautiously. MBNA, for example, the second-biggest card lender in the United States, after Citibank, said in April that it had set up an office in Shanghai to study the market (Kingson, 2004)."

Many credit card providers are waiting until the restrictions are lifted in China before determining whether or not to open. It is important to study the impact that the lifting of those restrictions will have on the Chinese credit card market.

With the impending events in Beijing, and the fact that foreign companies are soon going to be able to come into China and offer credit cards the potential is there according to the literature to grow a credit card market that is strong and safe, however being sure how consumers will react is an important factor in determining whether to keep working on the credit card market.

Methodology

There are several methods of study that can be used when it comes to a research study. For the purpose of this study several methods were researched and then discarded. The first method that was examined and discarded was the literature review. Literature reviews are a respected method of research in many areas of study.

For this study a literature review was determined to be an ineffective method of research for two reasons. The first reason is because there is very little literature published thus far about the market in the future for credit cards in China. The second reason it was rejected is for the purpose of how a market will do in the future it is important to use new research rather than study the old.

The second method that was examined and rejected was case study. A case study allows the researcher to get in depth conversations and information with the study participant. This is a good method if one participant or a few are needed but for research that is to be more large scale it is important to choose a method that is less time consuming.

The method that was chosen for the purpose of this study was the survey method. Surveys allow many more participants to be polled. The population can be much wider and broad-based which will allow a cross section of the population.

The survey method will be used because it also allows the data that is collected to be used in several manners.