Domestic banks may have to hand their profitable consumption credit business to foreign rivals on a plate, if they do not strengthen the service in this aspect immediately, an Outlook Weekly article warned.

China's robust economic growth in the past years has yielded mounting demand for consumption credit but the related service of domestic banks lags far behind.

Private consumers account for less than 1 percent of bank credit, according to the article.

And only 3 percent of the country's overall consumption is made on bankcards, compared to 81 percent in America and 64 percent in Europe.

The so-called "bank card," for most bank clients in China, means a type of deposit card that bans overdrafts. Domestic banks are extremely picky in granting credit cards.

The credit card service is viewed as a hot spot in the contest between domestic and foreign banks following China's WTO entry.

China's annual lending interest rate is 6 percent, while the overdraft interest rate is 18 percent, which has made many foreign banks "drool" over the domestic credit card business, said the article.

With their wide experience and sophisticated transaction systems, foreign banks have an edge over their Chinese counterparts in the credit card business, although the number of their outlets in China is small.

Besides credit cards, they are expected to carve into other aspects of consumption credit, such as mortgage loans for home and car buyers. The prospect of these services is tremendous given China's vast population.

The credit card is just the vine, and foreign banks will naturally "follow the vine to get the melon," the article quoted a Chinese saying.

For domestic banks, improving the consumption credit service is not only important to parry challenges of foreign rivals but also key to stimulate consumption and sustain economic growth, the article noted.

Domestic consumption is now playing a sheet anchor role in China's economic prospect, as its foreign trade has been battered by the global economic downturn.

The massive consumption of electrical appliances and textile products in the 1980s greatly fuelled China's economic growth.

However, today, cars and houses have become the top need of most of the 400 million Chinese urban residents, which they cannot afford without credit loans.

The consumption credit service will be the "ignition" to boom domestic consumption, according to the article.

In fact, China's conditions for developing consumption credit are maturing.

China's per capita gross domestic product (GDP) has surpassed US$800, and the demand for private houses is expected to surge in the future. Car consumption will also increase after China trims import tariffs in line with WTO standards.

Technically, data processing and saving technology has been widely used and can support the building of a national credit record system.

Despite consumers' needs and banks' enthusiasm, consumption credit remains a virgin soil in China.

The reason behind the puzzling phenomenon is complicated, the article noted.

Chinese custom states people should cut their coats according to the cloth, and spending on deficit is regarded as a sin.

Although the traditional belief is changing alongside the restructuring of the economy, it cannot be reversed overnight.

Meanwhile, the income of the majority of the population -- farmers -- is increasing very slowly and the number of laid-off workers is expected to grow with the deepening of economic reform.

The situation can dent the confidence of consumers and make them tighten their purse strings.

The imperfection of the financial and legal systems also curb the development of consumption credit.

Domestic banks often have limited access to the background of credit applicants because China has yet to establish a private credit system nationwide.

Moreover, the current collateral law has no stipulations concerning terms of collateral on consumption credit. Therefore banks tend to offer rigid terms to applicants for fear of risks.

Only 5 percent of car buyers get loans from banks, and 29 percent of applicants for car-buying loans opted to quit by the halfway stage because the procedure was said to be as tough as "stripping their skins," according to the article.

Even house mortgages do not appeal to banks because the trade of real estate is subject to mumbo-jumbo formalities and cannot guarantee the liquidity of bank assets.

The government will be the key to the future of consumption credit business, said the article.

The government should organize different departments, including the central bank, a business administration department, a public security department and securities companies to provide reliable data for a national private credit record system.

The experience of Shanghai can be drawn upon in the formation of a national system, the article suggested. The Chinese financial hub took the lead in the country and established a regional credit database a year ago.

The government should also play an active role to promote the legislation of a law governing consumption credit, the article added.

The new law should contain specific rules on the terms and procedures of consumption credit and offer clear reference in the practice of banks.

( January 8, 2002)