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Shopping is already an important recreational activity in China, and boosting consumer demand is one of the Chinese Government’s key priorities. Retail sales exhibit double digit growth, online retail is going through the roof, and China’s post 1980 generation is smitten with foreign brands. Yet relatively few Chinese consumers use credit cards, including those who actually carry them. And here’s why. 

The Wall Street Journal’s China Blog recently addressed this matter. It pointed out that about 75% of China’s “urban middle class families” have credit cards, while only 9% of China’s urban dwellers plan to use such cards this year, based on research from BCG and CLSA. Another report from CLSA shows estimates from MasterCard that China will have more credit cards than the US – 900 million – by the end of the decade. But while Americans max out their credit cards, the Chinese seem to save such personal credit facilities only for emergencies and special occasions. The WSJ team found this perplexing, but we think it makes sense.

We first look at the usual suspect of anything to do with China’s economy — the data. Indeed, China already has around 250 million credit cards, up from less than 5 million a decade ago. At the same time, the credit card penetration rate in China’s urban areas is still lower than 10% (See slide 17, here). While the numbers in this case are reliable, they nonetheless point to a statistical illusion. Yes, China has 100s of million of credit cards, but they seem to be at the hands of relatively few people. And so, personal credit aggregates might seem low when measured against the country’s overall (or urban) population. In reality, the country’s actual (as opposed to statistical) credit card users may be fewer and not as frugal as originally assumed.

The second problem with looking at aggregates is the assumption that those who love spending are also those who have access to credit cards. In reality, many post 1980 Chinese – not to mention post 1990 ones – would have loved to burn some plastic on their favorite brands. But we suspect that a relatively small share of such consumers actually have credit cards, as these are usually issued to older consumers who have a steady income. Such consumers usually also have a family, different priorities, and different spending habits. Once local banks do issue credit cards, they usually impose low usage limits which makes local credit cards far less exciting than US ones.

Booming online sales stimulate – and depend on – increased credit card usage. But China’s e-Commerce industry is built around cash or cash-like payments due to low consumer trust and institutional factors. In fact, even offline credit card transactions are often cash-like in nature, and involve keying a PIN which triggers a debit transfer, without relying on the credit of an intermediary. China’s UnionPay Credit-Debit cards, or Crebit Cards, are now accepted in many of the world’s department stores and luxury boutiques, allowing Chinese consumers to avoid credit even when swiping their cards abroad. Most consumers are reluctant to use their credit cards directly for fear of fraud and identity theft, and the PIN system provides them with a safer option.

Pin-based payments are also popular in Japan, where credit cards are used as cash-like instruments or as safety nets for emergencies. Japan’s relative dislike for consumer credit is explained by institutional path dependencies and/or Confucian spending habits. Whichever it is, China has both. Another anthropological explanation is China’s vast informal cash economy. Surplus cash is easier to spend on consumer goods than on rent or tuition, and thus competes directly with the Credit Card market for impulsive buying. Cash is also a favorite among Chinese officials, who are key supporters of local luxury sales.

China might indeed have 900 million cards by 2020, but consumer credit will remain relatively low unless such cards reach a broader strata of society. The growing popularity of online retail might help help, but not a lot, since e-tailers will continue to promote and facilitate cash or cash-like payments as they push deeper into China’s less developed regions. Finally, if the Confucian explanation is to be believed, even if China continues to grow, its consumers will pay for their newfound love for foreign brands in cash.

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