Houston Community News >> China Cozy up To E-Commerce

3/6/2007-- Many analysts argue that Chinese consumers are conservative spenders and not willing to buy on credit or engage in e-commerce. The numbers initially seem to support such arguments as China's household savings rate sits at 40% vs. less than 1% in the U.S. Credit-card penetration is low, with fewer than 50 million cards in circulation for an emerging middle class of 250 million.

While China's Internet users will hit more than 140 million by the middle of 2007 and will overtake the U.S. as the largest group within the next few years, critics believe that e-commerce will never take off here because, as a matter of culture, Chinese do not like it. But do these numbers and conclusions incorporate the seismic shifts in consumer habits in China that have been taking place in the last decade? The answer is a resounding no.

These skeptics fail to look at the changing demographics of China's consumers. Sales are now being led by a younger generation that is willing to buy on credit and shop online. In surveys and interviews that the China Market Research Group (CMR) conducted with Chinese youth between the ages of 18 and 28 in Shanghai, Beijing, and Guangzhou, more than 80% said they were willing to buy items online and over 70% said they would use a credit card if they could.

Baby-Boomer Optimism

The results indicate that old stereotypes of Chinese consumers stuffing yuan under their mattresses can no longer be attributed to the increasingly well-off middle-class Chinese youth segment. This bodes well for multinational companies that hope to tap into China's fever for Web 2.0 and e-commerce.

It is true that older generations of Chinese do save a lot- many have lost their pensions and are worried about paying skyrocketing medical costs. Most economists look at these age groups and argue that China's economy will have problems in the future if the government cannot jump-start consumer spending.

However, many of these economists have been far too simplistic in their analysis of the future of China's household savings rates in the coming decades. Consumption patterns are very different for Chinese born after 1978 - China's baby boomers. They have experienced 30 years of economic growth and political stability similar to those born during the post-World War II years in the U.S.

Wearing the Wealth

Our surveys show that Chinese between the ages of 18 and 28 save very little or actually buy on credit because they are so optimistic about China's economy and their own earnings potential. Their salaries are regularly increasing 25% a year as the competition for even junior talent is fierce and they job-hop like mercenaries.

These young professionals want to show their status in the workplace and spend nearly all of their salary on items such as Nokia (NOK) mobile phones, Zara clothing, and EstšŠe Lauder (EL) cosmetics. In focus groups we conducted in Beijing, we found that more than 70% of young women making between $500 and $2,000 a month expected to travel to Hong Kong and/or Thailand in the next three years.

Instead of running up bills on a MasterCard (MA) or American Express (AXP) the way consumers in the U.S. do, Chinese youth finance their lives of leisure by borrowing from their parents and grandparents. Having experienced the bitterness of the Communist-Nationalist Civil War and the Cultural Revolution, older Chinese are determined to see their children (almost always their only child) happy and want to live vicariously through them, and therefore shower them with money.

Credit-Card Culture

Chinese youth overwhelmingly want credit cards. To date there are fewer than 50 million credit cards in China compared with more than 1.1 billion debit cards. However, 2006 saw the addition of 15.6 million credit cards and 200 million debit cards, so more and more Chinese are adopting credit cards.

This is a big jump from 2004 when only 10 million cards were in circulation. The trend will continue as the Chinese banks up their services to compete with the onslaught of foreign banks such as Citigroup (C) and HSBC that are bulking up their offerings in China due to liberalized regulations.

The No. 1 reason so few people have credit cards, according to our findings, is not that they do not want one but that it is simply too difficult for the average Chinese person to get approved for one. They have to spend far too long dealing with an inefficient system of credit checks and sub par service, where consumers regularly have to wait in two-hour-long queues to see a teller, unless they have VIP cards.

Keep It at Home

Another problem is that even if you do get your hands on a credit card, domestic cards still lack viable credit limits because of weak risk-management departments. We interviewed one wealthy Chinese man who charges more than $1 million a year on his international American Express card but cannot get a Chinese credit card with a credit limit of more than $20,000. And even that comparatively high limit was only possible because he knows the chairman of the bank personally and has built up trust through transactions involving his company.

Chinese banks are also pushing to issue more credit cards to stave off flocks of Chinese shifting their money to foreign lenders. The state-owned China Daily newspaper conducted an online poll that showed 57% of Chinese wanted to switch their savings to foreign banks once they are able to in March. Chinese banks are continuing to reform and see credit cards as an important component of their futures if they want to compete on an international level.

The Industrial and Commercial Bank of China and Bank of China (BACHF) have each issued 10 million credit cards to date and market leader China Merchants is pushing hard to develop credit cards for use in online transactions. China Merchants has done more than any other Chinese bank to come up with co-branded credit cards for use by Chinese consumers - especially younger consumers. To date, China Merchants has forged relationships with Young Card, Bertelsmann, Rayli, Hello Kitty, MSN mini, Ctrip (CTRP), Air China (AIRYY), and China Southern to name a few.

Virtual Money

The rise of virtual currency used in online gaming environments in China shows that Chinese youth love e-commerce - if taking part is convenient. Because of the lack of credit cards in circulation, for many Chinese consumers the first introduction to e-commerce comes through the use of virtual currency. Several hundred million dollars' worth of virtual currency was purchased last year, and the size of the virtual currency market is growing 30% annually.

The numbers have become so large that the Chinese government has issued warnings about the effect virtual currency can have on China's financial stability by causing money supply problems, inflation, and avenues for money laundering.

Millions of Chinese youth are spending hours each week playing online games, writing blogs, chatting through instant-messaging services such as QQ, and streaming music from portals such as Baidu.com (BIDU). To facilitate online transactions and retain active users, many of these Internet sites have minted virtual currency that can be exchanged for goods and services.

Chinese netizens like virtual currency because acquiring some does not require a credit card or even a bank account. Tencent (TCEHF), the provider of the leading QQ instant-messaging service and leading online game host, is China's virtual-currency leader. Its customers can purchase Q-coins using cash, through mobile-phone cards offered in tandem with China Mobile (CHL), or up until recently, by winning the coins in online gaming competitions.

eBay vs. Taobao

The coins, which are purchased at a rate of one Q-coin to one yuan, are valuable to online consumers as they can be used to purchase ringtones, use antivirus software, send e-cards, and in some cases buy tangible goods. When one combines the Q-coins with similar offerings from Netease.com (NTES), Baidu, and Sina (SINA), the virtual-currency market becomes a power that can influence China's financial markets.

Although eBay (EBAY) did not do well in China, e-commerce is booming. Many Chinese are going to online auction sites and stores in search of broader product selection or better deals than they can find around town, and every year more and more Chinese are flocking to online auction sites such as Alibaba's Taobao or online sellers such as dangdang.com and Amazon (AMZN) subsidiary Joyo.com to buy products and services.

The aggregate of all online transactions in China is impressive. Last year, the total value of all online transactions, both business and consumer, soared to $127.5 billion, up from $85 billion in 2005. The consumer side represented a fairly small portion of this amount, but with an estimated 50 million Chinese engaged in e-commerce, growth is extremely promising.

Credit Grows Commerce

As more credit cards are adopted, then e-commerce will continue to grow. The demand is there, as shown by the eager adoption of virtual currency. China's banks have to catch up to the demand by issuing more credit cards. Multinational companies that can integrate e-commerce processes to tap into China's emerging middle class will do well.

(Contributed by News Week)