When does the Chinese Credit Card Crisis Hit?

Koreans, as in Koreans who live in Korea, are not the best drivers. Korea has some of the highest car fatality rates in the developed world. The first time I set foot in Korea, it struck me how almost every car on the road had some kind of dent. Road rules seemed Darwinian. If you had the biggest vehicle, you had the right of way. Pedestrians were 10th class citizens, even on sidewalks.

Oddly, Korea introduced mandatory car insurance in the 2000s and I noticed people's driving markedly improved. When the threat of a monthly premium goes up, you tend to drive better.

Koreans still aren't great drivers. The mortality rates on the roads are high. An interesting explanation was Korea has only recently become a car culture. North Americans have been driving for generations. The rules of the road are learned from birth. Koreans have had to quickly ramp up. In fact, Korea industrialized in the space of a single generation and the culture had to ramp up across a broad range of things westerners mostly take for granted.

Credit cards were another learning experience for Koreans. Back in 2000, I whipped out my credit card to pay for a meal and my Korean dining companion was worried I needed cash. Why was I going into debt to pay for a meal? Only a decade ago, Koreans largely understood credit cards as a method for going into debt, not as a means of convenience. Korea was a cash-based society.

When I visited Korea a few short years later, everyone had credit cards. Multiple credit cards. The various credit card companies negotiated deals with other companies for outrageous discounts when you used their card. For example, if you used your Samsung Visa at Outback Steakhouse on Tuesday, you got 30% off your dinner. If you used your Korea Bank MasterCard at Starbucks you got a free size upgrade on your beverage. Credit cards became glamorous lifestyle things. Korean banks started issuing them to younger people with smaller incomes and poor credit ratings.

And then the party stopped about 2004. Korea had to form a government run "Bad Bank" that consolidated the bad debt. The terms were pay off 3% of your debt up front and pay off the rest over 8 years. And if you didn't pay? Well, Korea doesn't have debtor prisons but they can deny you a passport if you default on a debt. For many Koreans who study overseas as a means to get ahead in Korea, that would mean a death sentence to their future. Many viewed Korea's burgeoning sex industry (which accounted for 4% of GDP) as a result of this bad debt. Young women who couldn't come up with the 3% down payment on their debt were forced to come up with the funds by entering the sex industry.

[caption id="attachment_1398" align="aligncenter" width="300" caption="A Korean ad for a credit card, not for a job in the sex industry"][/caption]

Now, if Korea has a sub prime lending crisis, it's an interesting lesson for the textbooks. If the USA has a sub prime lending crisis, it leads to a world-wide economic collapse. But what about China? I was watching a news report the other night about young Chinese with little to no income getting credit cards, living high on them, and then being unable to pay their debts. The banks first go after the parents and if the parents don't make good, they throw the kid in jail. Well, when it's your only kid by law and you rely on him to provide for your retirement, you don't let him languish in jail for long.

So, what happens if China in the near future repeats the Korean experience? Korea had 4.3 millions bad credit card accounts (in a nation of 48 million people). They rang up $40 billion in bad debt. What happens if 120 million Chinese credit card accounts go delinquent? Say each Korean rang up about $9,000 in bad debt per credit card. If China repeats the pattern that's $1.1 trillion in bad consumer debt. Hmmm. Does that number look familiar?

Korea loosened up its credit card regulations to try to balance out the economy. Like China, in the 1990s it was an economy heavily dependent on exports but its internal consumer economy languished. Korea made it easier for consumers to get credit cards, which of course makes it easier to buy. Korea also, curiously, gave consumers a tax write-off on stuff they bought. Like if you went to Outback Steakhouse, you could submit your receipt at tax time and get a tax credit when you filed your income tax. Imagine that?

In the USA, about 70% of GDP is consumer spending. In China it's about 41%. Germany is about 58%. Clearly, growing the consumer side of the economy will prove attractive to China in the near future. And credit cards will probably be the way to go.

-- Karl Mamer