Piece by piece

Foreign banks may be queuing up for the chance to distribute credit cards to a Chinese population that has been starved of commercial banking services, but the switch to a credit-based economy is not going to take place overnight.

It is a case of striking a balance between weaning people out of their long-held "save and spend" habits and preventing the credit meltdown that took place when Koreans overindulged in the "buy now, pay later" phenomenon during the 1990s.

For retailers keen to see goods flying off the shelves, this means one thing: hire purchasing. Consumer electronics retailers such as Gome, Yongle and Suning have launched the "buy now, pay in installments" model in several cities and the credit converts are growing in number.

"You can use the product immediately without tightening your belt," said Zhan Tao, an entry-level marketing executive, who recently hire purchased a Nokia 6680 from Yongle Electronics. "And it’s not complicated." All shoppers need do is sign a hire purchase agreement in the store, and then settle the balance across 12 or 24 monthly installments.

"It’s an ideal choice for those with tight budgets who badly need certain items," said An Lizhang, an office administrator in his early 30s. An bought a refrigerator and a washing machine through hire purchase after using up most of his savings on the down payment for his new apartment.

According to statistics from the People’s Bank of China, individual credit consumption totaled US$195 billion in 2003, an increase of more than 21 times over 1999. However, as much as 90% of this credit spending went on big-ticket items like houses, cars and education.

Despite hire purchasing merely being an extension of this existing system, there are those who still frown on it. Tony Chan, an account executive with a photographic company, remains uncomfortable at the thought of living in debt while Ivan Yuan, an IT employee at a logistics company, is skeptical about the "hidden extras" involved in hire purchasing items such as laptop computers.

"They can be priced nearly RMB1,000 (US$124) higher than those sold by other dealers," he said. "And then you can’t bargain for a lower price, while negotiation at one of the ‘digital city’ markets can make it RMB300-500 (US$37-62) cheaper. The price of a laptop also falls quickly, but you can’t adjust your payments during the two-year period."

State bank employee Alex He has reservations about the quality of products available. "The choice is so limited," he said. "The laptops you can hire purchase are mainly second-tier products, targeting university students or new graduates."

A representative of Bank of China’s Bankcard Department in Shanghai confirmed that the service was aimed at the budget-conscious. "The hire purchasing services currently focus on home appliances and digital products with young people forming the largest buying group," said the representative. Hire purchase transactions made using BOC’s Great Wall credit cards in Shanghai have reached US$930,000 since the service’s debut in March 2005.

Starting small
Figures released by Gome showed that from May to end the end of August 2005, 25,000 people hire purchased US$31 million worth of products in 11 cities across the country. This shows promise but it still accounted for just 5% of the total sales volume in those eleven cities, unsurprising for a new service largely targeted at a niche market.

The story is remarkably similar over at rival retailer Suning. "A very small proportion of our consumers are using hire purchase at present," said Zhu Jiagui, marketing manager at the company’s Shanghai branch. "But with growing consumer acceptance and promotion by banks and retailers hire purchase revenues are expected to rise."

Statistics provided by the State Council’s Development Research Center reinforce this sense of optimism. People spent twice as much on consumer electronics as they did on automobiles in the first half of 2005, yet the total amount of credit extended on purchases of electronic goods was only 40% that of automobiles.

Companies are already racing to fulfill consumer demand for an expansion in hire purchase products. China Comfort Travel is promoting hire-purchase outbound travel; a private hospital in Zhengzhou, Henan province, was swamped with inquiries after it said it would allow staggered payments for medical services from 2006; and the Shanghai Pudong district government now lets entrepreneurs effectively hire purchase their businesses by paying the start-up capital in installments.

Typically, when a country’s gross domestic product per capita reaches US$1,000-3,000, credit consumption starts to boom. Those in the know accept that China, which passed the US$1,000 GDP per capita mark in 2003, is making tentative steps towards this.

"Hire purchasing is sure to drive up credit consumption, which will become the dominant trend," said BOC’s Zhang.