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    China Business
     Oct 15, 2005
Time for a Chinese Equifax
By Frederick W Stakelbeck Jr

The expanding Chinese economy is causing fundamental changes in the way businesses and customers interrelate and the expectations associated with these relationships. Although China is still largely a "cash-centric" society with minimal credit exposure, many corporate executives, economists and global investors see sustained growth and vast opportunities in China's underdeveloped consumer credit markets. "Chinese prosperity will boost the demand for retail-lending products such as car loans, credit cards, and mortgages," the McKinsley Quarterly, an on-line

market analysis journal, noted recently.

Recognizing the potential for significant profits, increased market share and cross-selling opportunities, large financial institutions such as the Bank of America, Royal Bank of Scotland, American Express, and Goldman Sachs have invested over US$20 billion in the Chinese banking sector over the past year alone. A recent report by The Bank for International Settlements (BIS), a international association that fosters cooperation among the world's central banks, supports the view that consumer spending will increase as a result of lower interest rates, reduced bank losses, higher incomes and a growing middle class.

Despite the dramatic rise in foreign investment, improved banking conditions and the growing prosperity of ordinary Chinese, one key obstacle stands in the way of continued growth in the Chinese banking industry - the lack of a national consumer credit bureau analogous to Equifax or Experian in the US. Consumer credit bureaus are organizations that collect, manage and distribute positive and negative information on the creditworthiness of borrowers. The collection, reporting and sharing of consumer credit data has been strongly encouraged by both the World Bank and International Monetary Fund (IMF) as a means of facilitating economic growth and ensuring a stable consumer lending environment. The credit history information disseminated by consumer credit bureaus helps lenders assess and monitor the inherent risks associated with lending, allowing credit providers to make informed decisions.

Credit report data are beneficial for both businesses and consumers in several ways. First, the data provides a reliable snapshot of consumer behavior for the purpose of objective decisionmaking. Second, cost and price savings for all parties are realized as a result of increased information sharing. Third, consumers gain greater access to credit as positive payment history data is shared among lenders. Fourth, fraud is reduced adding a degree of consumer confidence and trust in the overall economy. Finally, increased financial sector transparency occurs, which addresses various concerns of consumer groups, legislators and government banking regulators.

Strong historical, cultural and structural factors may impede the development of a national consumer credit bureau in China. In the absence of accurate credit bureau data, many Chinese banks have traditionally placed less emphasis on sound risk management practices. Other banks have simply failed to properly monitor the banking relationships of their customers, often granting excessive credit lines that resulted in high loan delinquency and loss rates.

Soomee Har, head of Chinese consumer banking at Standard Chartered Bank, says that such practices can be dangerous. "A structured approach should be taken before lending to a customer, making use of the credit bureau, the bank's internal databases and checks on appointment records and residential information. Then we can make an informed decision about a customer's creditworthiness."

From a cultural perspective, borrowing in mainland China is still perceived by many as somewhat shameful - an indication that a person cannot make a living. As a result, Chinese consumers often use informal channels such as family and friends to finance purchases, effectively eliminating an impartial assessment of their payment history which could be used to determine creditworthiness in the future. As the Chinese economy grows in depth and scope, long-standing cultural barriers will need to be addressed in a prudent manner.

Another issue is technological: many Chinese banks still lack integrated computer networks that will allow them to link to a national consumer credit bureau, especially at the branch level. This deficiency will require major investment before national consumer related data can be properly used. In addition, many bank personnel do not possess the requisite skills and training to operate in a diverse, high-paced and technologically advanced banking environment.

Progress being made
Currently, a consumer credit database exists in the city of Shanghai, while several other smaller consumer credit information systems also exist in other cities and provinces. In addition, pilot projects have been considered by the People's Bank of China (PBoC), the country's central bank, for the cities of Beijing and Shenzhen.

Wan Cunzhi, deputy director of the National Credit Administration Bureau, an agency of the PBoC, told attendees at a recent credit forum that China was planning a national consumer credit bureau to address concerns expressed by the banking industry. The new credit bureau will be designed to capture insurance, tax, loan, utilities, and criminal records information; customer identity details; academic performance and court judgments. A national consumer credit bureau linking all of the existing credit information networks together is expected sometime in 2005 or 2006.

For the time being, however, the city of Shanghai has the best consumer database available. In July 2000, the city launched its consumer credit bureau, the Shanghai Credit Information Services Co Ltd (SCIS), using data from 15 participating domestic banks, telecommunications businesses and energy companies. Foreign banks such as US-based Citibank are currently working with city officials to gain access to the SCIS's database which includes 3.7 million consumer records. But with a middle class expected to reach 400-500 million by 2015 and a total population of 1.3 billion people, many domestic and foreign creditors are still left to utilize the payment records of mobile phone companies as the chief determinant of a customer's creditworthiness.

Steady progress has been made in other areas related to consumer credit. In June, China launched the National Credit Standardization Group, with the mission of building a credit standardization system by 2008. The new standardization system will deal with the basic terms of credit, various credit grades, guidelines, and related forms. "In an information society, there must be a publicly recognized standard to test creditworthiness, otherwise, people will have different standards, even within the same industry or field," said group leader Zheng Weihua. In addition, the People's Bank of China has been working closely with Experian of the US to establish the country's first credit management authority, the State Credit Bureau.

Standard Chartered Bank's Soomee Har sees a national credit bureau system as an essential component of any growing economy. "As the credit market grows, the government is putting together the right infrastructure, such as the credit bureau, to ensure that we are growing and sustaining that growth with a robust credit decision-making process." Ms. Har went on to say, "We are very interested in doing our best to help lenders in China as they embark on the development of the national credit bureau."
Lessons from others
An over-liberalization of credit standards enacted simultaneously with an inadequately developed national consumer credit bureau can have disastrous consequences for an emerging economy. To avoid this problem, it will be important for Chinese banks and government banking officials to partner with other Asian central banks in Taiwan, Malaysia, Indonesia and Japan, western financial institutions and European Union countries, to gain the necessary credit and risk management expertise to build a vibrant national consumer credit bureau.

In this regard, South Korea's disastrous government-sponsored experiment of the late 1990s, which caused the implosion of the country's domestic credit card industry should serve as a lesson for Chinese policymakers. Insufficient internal controls, ineffective risk management procedures and an immature national consumer credit bureau all contributed to the eventual financial meltdown that harmed an otherwise healthy economy.

In its push to establish a national consumer credit bureau, China should closely study the US consumer credit bureau model. Consumer credit bureaus first appeared in the US in the late nineteenth century as a way for members to share consumer information for debt collection purposes. Today, the US has three national credit reporting agencies: Equifax, Experian (formerly known as TRW), and TransUnion LLC, which maintain 1.5 billion records on 200 million individuals, as well as a number of private consumer credit registries. Typical consumer credit reports contain personal identification information (social security, birth dates, and so on), public record items, recent inquiries and account histories.

Chinese government banking officials should also encourage the creation of private credit bureau registries to participate in the collection, management and reporting of consumer credit data. This will lead to healthy industry competition and an improvement in the overall quality of the consumer data disseminated to consumers, member financial institutions, independent groups and government agencies. Building a national consumer credit bureau architecture that blends the proven aspects of several Asian and western credit bureau systems with the unique features of China's own economy will provide the basis for moving forward.

China is at the crossroads of a consumer credit revolution. With this in mind, the type and quality of data available and the mechanisms by which information is shared will be essential at all levels of the credit risk management paradigm.

In order to achieve the momentum and synergies necessary to succeed in today's competitive global economy, China should move forward in earnest with the development and implementation of a national consumer credit bureau. Although the collection of consumer data is an especially daunting task for a large, increasingly complex economy, it will be important for China to successfully navigate the stormy waters which lie ahead in the consumer credit arena. Once fully developed, China's national consumer credit bureau will be a tremendous asset for businesses, consumers and investors.

Frederick W Stakelbeck Jr is an expert on bilateral and trilateral alliances as they relate to China foreign policy. His writings address the implications of China's emerging regional and global strategic influence and relationships upon US national security. Comments can be forwarded to frederick.stakelbeck@verizon.net.

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Feeding frenzy for overseas banks (Sep 30, '05)

Taiwan tackles high credit-card default rate (Aug 18, '04)

Behind the crisis in South Korea's economy (Jul 20, '04)

China's consumer era takes hold  (Aug 6, '03)

Asia's consumer revolution gets serious (Mar 15, '03)

Korea's economy comes full circle (Jan 4, '03)


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