China takes careful steps towards personal banking

When Wang Xiaoyu set out to buy some sleek Lincoln automobiles for the small company he owns, the problem was how to pay. No dealer in China accepts personal cheques. Credit card limits are too low. Car loans barely exist.

So he brought cash, more than $200,000 worth of it, in three rolling suitcases.

"Everything else is a lot of trouble -just easier to use cash,'' said Wang, 29, who runs a consulting company that helps Chinese businesses find foreign partners.

China's state-owned banks rank among the highest-valued in the world, with stock market capitalisations in the billions of dollars, but they are widely considered the weakest part of the country's booming economy.

Although China has made strides in reforming its banking system over the past five years - cracking down on corruption, buying out many troubled loans and allowing foreign banks into the market - retail banking remains stuck in an earlier era. The problem is not new, but the number of people in China who have enough money to need modern banking services is soaring. The system has not kept up.

No plastic money

Many employees' salaries are still distributed in fat envelopes of cash rather than by cheque or direct deposit. It is not unusual for life's major purchases, such as cars or even houses, to be paid for in cash.

It is not just the banks stuck in the past; there is consumer resistance in China to financial tools that are routine in other countries. Credit cards are gradually spreading, for instance, but many people embrace them chiefly as a fashion statement. There are floral-scented ones, cards bearing Hello Kitty logos, pink cards aimed at women. But because they are only accepted at some stores, such as designer boutiques and larger chains, their utility is limited.

The underdeveloped financial system has frustrated many Chinese consumers and foreigners trying to do business in the country. But China's banking regulators say the slow pace of change is in the national interest. China's financial leaders say they are cautious about moving too quickly because they see the problems that has caused in other countries. They cite the US as an example of what can happen to a country that hands out credit too loosely, pointing to high levels of indebtedness among young Americans and the recent problems in the mortgage industry that have caused families to lose their homes.

Wang Huaqing, assistant chairman of the China Banking Regulatory Commission, said in an interview that in recent months, the country has been alarmed to see novel financial schemes crop up.

People have been caught taking out cash from credit cards and loans to gamble the money away in the stock markets or on speculative real estate. Gangs have been investigated for stealing people's identities to open accounts. And criminals have been put away for laundering money.

"We have been paying great attention to credit card risk and loan risk,'' Wang said. As a result, Wang said, the country is trying to avoid allowing citizens to get their hands on credit too easily. He said restrictions on retail banking - such as a $50,000 a year cap on how much a Chinese citizen can convert from yuan to foreign currencies and low credit limits on cards - are meant to prevent these problems from spiralling out of control.

Role in Communist era

The slow development of consumer banking in China is rooted in the role banks historically played in the Communist state.

Until a few years ago, China's banks essentially were agents of government social policy, keeping state-owned enterprises afloat. Retail banking existed on a limited basis.

Chinese citizens who wanted to invest had no choice but to put their money in state-owned banks because foreign banks were not allowed to operate in the country and because stock markets did not exist.

Furthermore, the banks had little financial incentive to introduce fee-based retail banking. They were already markedly profitable from a large spread between lending and deposit rates, both controlled by the central government.

Now, retail banking is still a secondary reason for banks' existence. China's banks mostly supply credit to enterprises, said Arthur Kroeber, managing editor of the China Economic Quarterly in Beijing. He said the banks are not like those in the US, which, he said, "provide credit to the creditworthy.'' They are "more like the idea of banks in Japan in the '70s or South Korea in the '80s and '90s.''

"In a broad sense, the main purpose of the state-owned banks in China today is not profit maximisation for shareholders,'' he said. "It's financing industrial development.''