Although investors believe that China is in the midst of another upsurge in consumer spending, the country’s financial market might be facing a rocky road in its near future. Experts believe that in the next ten years, the market may double, creating a new sector of Chinese and foreign finance companies, however, Chinese consumers have yet to embrace buying on credit.

In February, Citibank and Shanghai Pudong Development Bank launched a dual currency credit card in China. Luo Ning, vice-president of Risk Management at Citi Credit Card Company, said that the biggest problem facing the acceptance of credit cards by the public is a shortage of credit data and a credit culture. Consumers are reluctant to borrow money even though they have a credit card. According to officials, in 2002 credit cards accounted for only 2.7 percent of total consumer spending. About five percent of those holding a credit card used it for loans.

Experts differ on the reasons Chinese consumers are wary of credit. Tu Yonghong, a finance professor at a university in China predicts that the consumer credit market will expand in line with the economy over the next decade. He expects car and home loans to be a significant portion of the expansion and bases his figures on expected income growth for city dwellers and a shift to the cities from the rural areas.

Despite Tu Yonghong’s optimistic forecast, financiers remain skeptical. They have faced considerable difficulty in their efforts to develop this market.

Luo Ning says that since the first card was issued there in 1985, China has the most credit cards of any country. He added that the level of consumer credit is very low; only two percent of the 700 million cards in circulation are credit cards. The remainder are mostly debit cards.

Credit card companies are concerned that they cannot estimate the consumer’s credit worthiness. But these agencies have developed a uniquely Chinese way to judge a consumer’s experience. It is done on the basis of profession rather than income. This seemingly biased measure has in fact turned out to be quite effective.

Professor Tu Yonghong explained, “One’s income is linked to one’s profession. Some professions make more money, such as telecommunications, law and medicine. Public officials too have a relatively stable income. Not only is income important, but so too is the ability to pay back the loan and their attitude towards credit. Some professionals value their reputation very much so they will pay back the money by every means possible. Some others have high incomes, but they don’t value their reputation very much, which is a factor for consideration when banks make their decision.”

AnJia Business faces a rough road ahead

With its headquarters in Shanghai, the Anjia Corporation is the largest real estate finance and information company in China. Its trade volume for second-hand houses exceeds five billion yuan (US$600 million). Anjia’s CEO Zhang Xudong agreed that compared to Western real estate and mortgage companies, Anjia business is much more difficult.

“In China, people feel nervous when borrowing money to buy their first home. They’ve never had a loan before so they have no idea about borrowing money. We need to comfort them first, telling them that it’s not a problem as long as your income can guarantee that you make the repayments,” he says. “We need to educate them in which loan type is suitable, the length of loan and the monthly payment.”

Regardless of the difficulties, Mr. Zhang is full of confidence for the future of the Chinese consumer credit market.

According to internal reports, the central bank is planning to establish a credit system for the entire nation with commercial banks. Once this system is established, the consumer credit market is sure to expand rapidly.