Consumer spending is not on the cards

The world, teetering on the edge of another financial crisis, needs China's consumers to save less and spend more. China needs its consumers to drive up domestic demand so it can reduce its heavy reliance on exports to keep fuelling economic growth, and Western countries want more business from China.

Unfortunately, China's consumers are not playing ball. They are still diligent savers and cautious spenders, as evidenced by the country's consumption to gross domestic product ratio of 36 percent - only half that of the US and about two-thirds the figure for Europe.

Bank executives have been optimistic that credit cards will work their magic on Chinese consumers, just as they have on consumers elsewhere. With about 230 million issued by 2010, they have been salivating at the prospect of tens of millions more consumers adding credit cards to their wallets.

With more than 2.1 billion debit cards in use for a population of 1.3 billion, it was perhaps only natural to assume that Chinese consumers would have a voracious appetite for plastic payment methods. But, this expected exponential demand for credit cards has not happened.

Also denting revenue forecasts for banks is that their Chinese credit card customers have not proved to be particularly profitable so far. Profitability per card, according to the Lafferty Group, is thought to be roughly only $1.

New research conducted on young affluent credit cardholders at a private university in China sheds light on why the picture is unlikely to improve dramatically for credit card companies any time soon. The research, a joint project involving Australia's Monash University and the University of Nottingham Ningbo China, suggests that we should not rely on consumer credit to effect a major structural change on the Chinese, and by implication world, economy in the short-term.

We investigated the attitudes of young, affluent Chinese toward credit cards in order to determine the extent to which the product is likely to gain in popularity among this important group of consumers. It is, after all, among young people where major shifts in behavior tend to occur and from where new consumer spending trends develop.

We canvassed the views of more than 150 students - all credit card holders who received a generous allowance from their parents, which meant there wasn't a financial constraint on potential credit card usage.

More than half of the students used their cards only once a month or less. Nearly a third only used their credit cards once or twice in a year.

Postgraduates were overwhelmingly more likely to have more than one card and as many as three. Significantly, holding multiple credit cards did not result in greater usage.

The main reasons given for limited usage were: lack of a payment terminal infrastructure, even in a modern tier-2 city like Ningbo; and inconvenient repayment methods required by banks. In a nutshell: It is not easy to use and manage a credit card in China, even if you want to shop until you drop.

However, there is another obstacle in the way of the credit card market developing and it is potentially much harder to fix because it involves deep-seated attitudes toward money. Quite simply, young affluent consumers are very astute about the risks involved in spending on credit. They spoke of fears of overspending and a loss of financial control.

They are also keenly aware of the high costs of using a credit card to make cash advances. Some talked about feeling guilty spending money before they have earned it.

The good news for credit card companies is that the lure of marketing promotions in some cases outweighs the risk-aversion. This, our analysis suggests, is particularly the case for promotions that advertise discounts and additional free products because they tap into the cultural perceived necessity to both save and yet simultaneously accumulate products to show wealth to the outside world.

Reminding the young affluent that they are part of a new generation is also important in getting buy-in. Students spoke about credit cards making them "feel cool" and as objects to emphasize that they are different, and perhaps more sophisticated, than their parents.

But, overall, marketers have a tough job on their hands trying to convince China's affluent young to churn up debt using revolving credit. They still retain many of the conservative cultural attitudes of their parents when it comes to debt or using borrowed money.

The implications for the Western world are that it should not count on credit cards to get the tills ringing in China to help stimulate developed economies. Bank executives, meanwhile, would do well to consider other financial offerings for the enormous, but fairly elusive, affluent young customer base.

The author is assistant professor of Marketing at Nottingham University Business School China.

(China Daily 08/29/2011 page8)