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We at Maverick China Research would like to wish all of you a happy and prosperous Year of the Tiger!

 

Consumers Still Favor Cash

The flip side of having a "bankcard penetration rate" of 26% is that bankcards are still not being used for most payments. As in many developing countries, cash remains the most widely used form of payment in China. For convenience, for perceived safety, for a lack of other payment options, and even for no better reason that it being a lifetime of ingrained habit, cash is king. Even with recent advancements in payment and money transfer services (such as debit cards and interbank fund transfers), it is still quite common in China to settle major transactions with cash.

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Bankcards Used in a Quarter of Consumer Spending

According to the PBOC, China's "bankcard penetration rate" (defined as the total bankcard payment for consumer goods, excluding wholesale and real estate transactions) as a percentage of gross national retail sales was just under 26% by the end of September 2008. At the end of 2007, this figure was at 22%, and as recently as 2005, it was below 10%. In top-tier cities such as Beijing, Shanghai, and Guangzhou, the figure is higher but still below those of developed economies.

The rapid growth and utilization of bankcards, however, shows that Chinese consumers are willing to adopt alternative payment methods and is a positive sign for the development of electronic payments.

Next: Consumers Still Favor Cash

Credit Card Use Remains Low; POS Terminals Limited

While credit card issuance has grown quickly in the last two years, overall numbers remain very low. According to the PBOC, at the end of 2008, China had an estimated 145 million credit cards, up from 90 million in 2007.

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Bankcards Issued: 1.8 billion

The phenomenal growth of bankcard issuance (and banking in general) is one indication that Chinese consumers who grew up in a purely cash economy are open to adopting new methods of electronic payment. According to China UnionPay, the sole interbank fund transfer network and card issuer in China, about 1.8 billion bankcards had been issued by the end of 2008, up from 762 million in 2004. Included in this figure were 145 million credit cards, up from 90 million at the end of 2007.

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A Late Start to Electronic Payments

Due to the late development of the domestic credit card market, China's electronic payments market is essentially developing 50 years later than the US and other developed markets. This late start presents some challenges for consumers and companies interested in new payment systems. It also has left fewer legacy systems in place, however, and China's market remains more open to alternative e-payment technologies and companies.

The first Chinese credit card was not issued until 1986 by the Bank of China. Adoption was slow over the following two decades due to a lack of consumer demand, a dearth of merchants which accepted card payment, and the lack of a unified appraisal system in the banking sector. It was not until the founding of China UnionPay in 2002 that bankcards in China were finally unified under a nationwide network and began to be used in large numbers.

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Taobao and the Dominance of the Alibaba Group

Taobao is the largest online marketplace or online retail store in China today, controlling over three-quarters of the domestic C2C and B2C markets. Paipai, the second largest online marketplace in China, controls less than 10% of the market.

Taobao is sometimes referred to as China's eBay, but it has become a critical e-commerce platform for businesses as well. Since the company was formed in 2004, it has managed to overcome formidable challenges from global incumbents such as eBay and Amazon.

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Chinese Internet Users and the Role of Internet Cafes

The majority of China's internet users are under the age of 25, have at least secondary education, and are living in cities. They are not necessarily wealthy, though; as the figure below shows, approximately 74% percent of internet users have a monthly income of less than RMB 2,000 (~USD 300).

The Internet Bar Phenomenon

One of the main causes of the conflicting numbers of internet users derived by surveys is the predominant use of Internet bars in China. Internet bars in China remain the only internet access points for many of China's youth, as ownership of a personal computer is not common outside China's most industrialized cities.

 

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360 Million Internet Users

As of the third quarter of 2009, there were an estimated 360 million internet users in China, according to the China Internet Network Information Center (CNNIC). During the first 9 months of 2009, China added a whopping 62 million users, almost 7 million new users each month.

Although many dispute these numbers (some claiming higher numbers, others claiming lower numbers) and the methods used to obtain them, it is clear that internet use is becoming widespread and China has now eclipsed the U.S. as the largest online population in the world.

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Why is Alibaba Separating Its Domestic and International Management?

Alibaba Group has announced that its online B2B trading platform Alibaba will split its management team into international domestic groups. Hong Kong's Media magazine speculates that the move is due to disappointment over the company's international expansion efforts:

Alibaba’s restructure runs in parallel with its plans to bolster its name internationally. Earlier this month, it announced the appointment of a lead creative agency in Europe, the Middle East and Africa as part of its US$30 million advertising campaign launched last year to promote its brand internationally.

David Wolf, CEO of Wolf Group Asia, said that while launching a large-scale advertising campaign to attract worldwide users to its site is good practice in the current e-commerce environment, the restructure may be a forced move as Alibaba has spread itself too thin.

"Alibaba has chosen to go wide and spread across global markets, but in China its competition is getting stronger and if it doesn’t focus on the domestic market, it may find it’ll be losing its leadership position," Wolf said....

Christie Travers, corporate marketing manager of DHK, a competitor of Alibaba, points out that hiring a creative agency in July, nine months after Alibaba launched its global campaign, is also indicative that its global push has struggled to gain traction....

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