An Easy Way To Profit from China's Credit Card Boom

The Middle Kingdom doesn't have its own Karl Malden yet.

In TV ads that ran for years, a trenchcoat-clad Malden, who passed away last week at age 97, admonished U.S. consumers not to leave home without American Express traveler's cheques.

"Don't leave home without it" became the slogan for Amex cards, too. And over the decades, Americans took it to heart ― credit cards are now second only to the housekey in joggers' shoes, they're the first option for paying for birthday gifts, and they'll get you out of a jam if you need to book an expensive flight, quickly.

And while China may lack a pop-culture touchstone for credit cards, Olympic hero Liu Xiang is helping to push them:

 And consumers among the 1.3 billion-strong population are making more and more use of the powerful plastic they can put in their pockets. . .

There are more than 150 million credit cards now in use in Communist China.

Now, consider the fact that the raw number is only one aspect of a powerful electronic spending trend. . .

One that investors in international electronic payment companies like VeriFone (NYSE:PAY) can take advantage of.

The other side is that Chinese credit card holders are also increasingly testing the thin ice of credit card payment delinquency, as the central bank reported in late June.

The latest figures from the People's Bank of China (China's central bank) show credit card debt that's at least half a year overdue increased by 133% from the same period in 2008.

Moreover, the potential for defaults is still far greater than what has been realized to date. Even with a triple-digit jump already worrying central bankers, the percentage of six-month shirkers is still a mere 3% of total outstanding credit card debt.

Officials have reason to be concerned.

CC Debt: It's Everywhere You Don't Want to Be

China's current economic power in the world is largely owed to the Beijing government's stockpiles of cash and dollar-denominated assets (i.e. Treasuries). And the status of top-level coffers reflects a cultural predisposition toward saving ― rice and millet were the only food on millions of tables for decades in China, and only essentials were purchased with meager earnings.

The average household savings rate in China sat at 40% as recently as 2005, while Americans were simultaneously dipping into negative territory.

Chinese consumers and investors then witnessed an extraordinary boom-bust cycle, and first-time shareholders and cardholders all got knocked for a loop inside a quick few years.



The Shanghai Composite Index dropped by 70% from peak to trough in just about 13 months.

Today, economic disorientation is still a factor, as the Chinese stock market is recovering more quickly than most western exchanges. Morgan Stanley's China A-Share Fund ETF (NYSE:CAF) is up 56% since January 1, compared to an almost dead even return for the S&P during the same period.

The World Bank revised its 2009 China growth forecast upwards in mid-June, despite knocking its global projection down further into negative territory.

Loans are up, and deposit growth is down. UBS analyst Victor Wang says more stock investment options are drawing consumers away from bank vaults and into brokerage accounts.

"In the medium term, the banking sector's growth is set to come down as three drivers for strong deposit growth have all cooled off," Wang told Reuters, referring to previous double-digit yearly GDP growth, a huge trade surplus, and household savings patterns.

While growth is still in the black, the danger now is that overeager consumers could end up underwater if they don't play their cards right.

Don't fret, though. . . You can make money off of increasing credit card usage in China without worrying about individual or bank balance sheets.

Playing China with NYSE:PAY

China's card usage rates are growing fast ― the same PBOC report logged a 43% year-on-year jump ― but Americans still have 39 times as many. The gap is narrowing, and industry organization China UnionPay has led the charge for more Chinese to charge their purchases.

China UnionPay has agreements with VeriFone (NYSE:PAY), a California-based electronic commerce company, to bring Chinese credit card terminals in line with international standards and to make sure Chinese credit card users can easily wield their purchasing power abroad.