Imagine there was a law that said if you missed two credit card payments in a row, you had to pay the full balance immediately, with heavy penalties. And if you didn't, your bank would take out an ad in your local newspaper, calling you a deadbeat. Or worse, thugs in suits might show up at your office, haul you down to the bank and keep you there for hours until you signed a promise to pay.
Welcome to the world of plastic -- Chinese style.
Chinese banks don't have national credit bureaus and sophisticated scoring models that allow them to churn out approvals in minutes. Instead, armies of young workers pore over paper applications, manually verifying one piece of information at a time.
Yet banks in China have issued tens of millions of credit cards in recent years. Today, more than 100 million are in circulation among China's 1.3 billion people, up from just 3 million in 2003, according to analysts and bankers.
Unlike American credit card firms, which are cutting back because of rising delinquencies, Chinese banks are stepping up their marketing of plastic. In the next five to 10 years, analysts say, China could issue 1 billion new cards, largely to a mass market that has little experience with credit.
Chi Wei Joong, a former American Express Co. executive, runs the credit card operations for China Merchants Bank. He has more than 9,000 workers nationwide. In every major city, Joong's sales force researches office buildings, their occupancy rates, average rents and other statistics. A report is then sent to the bank's credit department, which assigns a credit score for the building before salespeople target folks who work there.
"This is to control risk," Joong said. But if borrowers default, he doesn't hesitate to turn the accounts over to more than 100 collection agencies.
Joong says fewer than 10% of his bad loans end up in court, but some people have gone to jail. Under Chinese law, a credit card user who intentionally defaults on a sum as little as $3,000 can be sentenced to as much as five years in prison.
The tough regulations haven't stopped the steady increase in troubled credit card debts at China Merchants and other lenders. Analysts estimate that banks in China this year were writing off 2% to 3% of their credit card loans, less than half of the July charge-off rate of 6.6% in the U.S., according to Fitch Ratings.
"In the U.S., all the credit card companies are chasing subprime borrowers" because most customers with good credit already have multiple cards, said Darwin Tu, chairman of Sino Credit Corp., an industry research and marketing firm. In China, he says, banks haven't saturated the prime market yet.
On average, a Chinese credit card holder has no more than two cards, compared with five for Americans, said Tu, a Stanford University graduate who cut his teeth at Fair Isaac Corp. in California, which pioneered credit scoring.
At China Merchants Bank, which has about 23 million credit cards outstanding, Joong says his department's loan-loss ratio has climbed from 0.67% in 2005 to at least 1.5% this year. Such numbers are likely to rise as more cards are issued to young adults, who belong to China's one-child generation, seen as more spendthrift than older Chinese.
Among Chinese credit card users, more than 70% pay the entire balance every month, says Nie Junfeng, a manager in the Bank of China's personal finance department. "This may be related with the tradition that Chinese people, as the saying goes, don't like eating next year's food this year," he said.
But the young generation is different, he said. "They're more comfortable spending tomorrow's money today."
Deng Jialing, 27, got his first credit card from China Merchants Bank in 2006 when he was working for a cellphone parts manufacturer in Shenzhen, making a little more than $500 a month. His card's limit started at about $400, and like all Chinese credit cards, his had an 18.25% annual interest rate, set by the government.
Deng bought a cellphone. The card was tapped out, and two months later, Deng got a second credit card, from China Construction Bank, the country's largest issuer of plastic.
Said Sino Credit's Tu: "Once you get a card, you show that one to another bank and they give it to you. [The data's] not linked."
After hitting the ceiling on the second card, Deng easily secured a higher credit limit. He applied for more cards, building up a balance of $17,000 at nine banks. His charges included electronic gadgets, food and a $4,000 hospital bill when he got pneumonia.
For a while, he played a cash-advance game, taking out money from one card to pay the minimum monthly payment on another.
Then, on a June evening, three big men in black turned up at his workplace in Shenzhen. Deng thought about slipping out the back door. But he met the men and followed them into a black sedan.
Sandwiched between two of them in the back seat, Deng was taken to China Minsheng Bank's credit card center across town. There, he said, the grilling began: Where did you spend all the money? Why can't you pay it back?
"I told them that I was at the end of my rope," said Deng, who owed about $2,000 to China Minsheng, which declined to comment. Five hours later, after being fingerprinted and signing an agreement to pay off the balance in three days, Deng stepped out of the bank and into the night. "I walked slowly to my home, thinking how had I come to this situation."
Analysts say cases such as Deng's aren't common in China. To keep it that way, China's central bank is developing a national credit resource system, something like Experian, Equifax and TransUnion in the U.S. As of March, the People's Bank of China said, its database contained information on nearly 600 million individuals. Of those, about 3% are noted for failing to pay bills or defaulting on loans or credit cards, says Joong of China Merchants.
Joong and other bankers use the database to screen out applicants who have been blacklisted, but the central bank's system doesn't contain a complete profile to assess the creditworthiness of the remaining 97%. Some banks don't share or make timely updates on consumer data, so lenders often don't know how much debt cardholders really have.
To discourage defaults, Guangdong Development Bank has taken out ads in newspapers, publicizing the identities of delinquent borrowers. Some banks frown on the tactic, but it isn't illegal.
Other card providers try to reduce risks upfront. State-owned China Construction Bank, for example, markets cards in Shenzhen through a cable TV company. When the cable installers make a service call to a home, they offer credit card applications and at the same time verify where residents live. Joong is considering a similar tie-up with water delivery companies.
But countervailing forces threaten to increase the risk of card abuse and defaults. Cash advances usually aren't supposed to be more than a small share of a card's credit limit, but consumers say merchants and finance firms ring up bogus or inflated purchases on credit, giving the cardholder cash, less a fee. Chinese lenders have started to offer balance transfers and other sweeteners to encourage customers to revolve debt.
Chinese bankers dismiss concerns that they could one day see the kinds of heavy losses that have plagued U.S. lenders during downturns or the sort of plastic debacle that hit South Korea earlier this decade when rules on credit were eased and consumers went wild with charges.
But others aren't so sure. "That depends on how banks control the cards," said Yan Yiming, a Shanghai attorney who specializes in economics and consumer law. "I can see that many are issuing cards very aggressively these days."
They're also going after bad debts very aggressively, as Deng learned. After that desperate June evening when he was taken to the bank, Deng called his aunt and borrowed $13,000, promising to pay her back, $370 a month. Since then, he has pared his overall credit card debt to $2,900.
"I am so ashamed," Deng said. "I have no face to meet my father. When I look back, I could only sigh."