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The young and the cautious

The world, teetering on the edge of another financial crisis, needs Chinese consumers to save less and spend more. Chinese consumers need to increase domestic demand so the country can reduce its heavy reliance on exports to keep fueling economic growth.

But Chinese consumers aren't playing ball. They are diligently saving money and cautious when it comes to spending money, evident by the country's consumption-to-GDP ratio of 36 percent - only half that of the United States and about two-thirds the figure for Europe.

Bank executives are optimistic that credit cards will be the answer to encouraging Chinese consumers to spend, just as they have on consumers elsewhere.

With about 230 million credit cards issued by 2010, bank executives are 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 circulation for a population of about 1.3 billion, it is only natural to assume Chinese consumers have a voracious appetite for plastic and would therefore be as enthusiastic about credit cards. This expected exponential demand for credit cards hasn't happened.

Credit cards haven't proved to be particularly profitable so far. Profitability per card, according to the Lafferty Group, is thought to be roughly $1 per year.

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, also suggests that we should not rely on consumer credit to structurally change how Chinese spend money, and, by implication, the world economy in the short term.

Credit cards, blamed for many a household's financial woes in the United States and Europe, are relatively new to China. They were only permitted beginning in the mid-1990s, resulting in structural impediments to the development of China's consumer finance industry.

It is well-known that the idea of saving is deeply entrenched in the Chinese culture. It is estimated that the average Chinese family saves 25 percent of its discretionary income - six times the savings rate for US households and three times the rate for Japanese.

Not common knowledge, however, is that youths are just as thrifty savers as the elderly. Urban households headed by 25-year-olds are believed to save about 30 percent of their disposable income. Households with sons are the main accumulators of assets, especially property.

We investigated the attitudes of young, affluent Chinese toward credit cards in order to determine whether they will become popular among this important group of consumers. It is, after all, among young people where major shifts in behavior tend to occur and how new consumer spending trends develop.

We chose The University of Nottingham's Ningbo, China, campus because it is located in Zhejiang, which is one of the most developed provinces in China, with high levels of income per capita and therefore a large potential for credit card usage.

University students make an ideal sample for a credit card study because they represent a section of the population who are quite different from their parents' and grandparents' generations in terms of their consumption behavior.

They are, in short, more likely to hold a credit card.

We canvassed the views of more than 150 students, screening them first to ensure that they were credit card holders. The majority of the students sampled received a generous allowance from their parents, which meant there wasn't a financial constraint on potential credit card usage.

In the case of undergraduates, the average annual allowance of 20,000 yuan (2,170 euros) is almost twice as high as the average annual income of a Chinese worker. Postgraduates typically receive about 45,000 yuan a year.

Most undergraduates, 71 percent, held a single credit card, while 75 percent of postgraduates owned more than one card and as many as three.

However, holding multiple credit cards did not result in greater usage. More than half of the students used their cards only once a month, with nearly one-third only using their credit cards once or twice a year.

The main reason given for the limited usage was the lack of a payment terminal infrastructure, even in modern second-tier cities such as Ningbo.

One student said: "Unfortunately, we cannot use our cards wherever we want. Small shops don't have payment terminals so we cannot use them as often as we would like."

The second most common reason for not using a credit card was the terms of the payment method.

Another explained her card was issued in her hometown. "When I want to pay it back I need to go there to give the money to the bank. I cannot do it here so I don't think it is convenient."

Clearly the banks and the authorities need to get together to find more ways to accept credit cards and re-think the awkward repayment method. Currently, it's not easy to use and manage a credit card in China, even if you wanted to shop until you drop.

There is another obstacle in the way of the credit card market developing, and it is potentially much harder to resolve because it involves deep-seated attitudes toward money.

Young, affluent consumers are very astute about the risks involved in using credit cards. And they are very aware of the costs associated with borrowing money.

Cardholders interviewed in focus groups told us that they believe it's more convenient to pay with a card than cash, and that they believe carrying cash can be unsafe.

However, these positive associations of credit cards were tempered by the concerns of the loss of financial control.

At least two-thirds of all of the students interviewed believed that paying by credit card encourages people to spend beyond their means, even if they use the card infrequently. And, they have tremendous feelings of guilt associated with using a credit card or racking up debt.

Several students made comments similar to this: "I don't like using future money to pay for today. I did not make any money today and I still used money (to purchase products) when I use my credit card . ... I feel guilty for that."

So, clearly, it is not just the convenience of the service provided that influences card usage, but there is also an underlying fear of overspending and a loss of financial control.

The good news for credit card companies is that the lure of promotions sometimes 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 others.

Signaling wealth is very important, though it is still best done in China by flashing cash around.

As one respondent in our study observed, "Cash is still king . A businessman with a lot of cash in his wallet shows that he is affluent."

Reminding the young and the 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 Little Emperors to churn up debt using revolving credit. They still retain many of the conservative cultural attitudes of their parents when it comes to debt.

They are also keenly aware of the high costs of using a credit card to make cash advances. Unlike their peers in the West, young Chinese consumers do not have a laissez-faire attitude to money and long-term savings goals.

The implications for the West are we shouldn't count on credit cards to get the tills ringing in China to help stimulate developed economies.

Bank executives, meanwhile, should consider other financial offerings for the enormous, but fairly elusive, young customer base in China.

The author is an assistant professor of marketing at the Nottingham University Business School China. Her full research report on credit cards in a Chinese cultural context, with professor Steve Worthington and David Stewart of Monash University's department of marketing, is in the latest Journal of Retailing and Consumer Services. The opinions expressed in the article do not necessarily reflect those of China Daily.

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