Late last year, American Express received a long-awaited prize from Chinese regulators — permission to start establishing a payment-card network in one of the world’s largest markets.
American Express was the first U.S. company to win approval after a 10-year industry battle to enter a market China has long guarded from outside competition. The development appeared to signal a breakthrough in Washington’s acrid trade relations with Beijing.
But many say the approval is too little, too late. Over the years that China has stymied Western companies, domestic rivals such as China UnionPay, Alipay and WeChat Pay have gobbled up the market for electronic payments and established strong ties with consumers. State-controlled UnionPay now operates the largest card network in the world, with 7 billion credit, debit and prepaid cards in circulation, versus 5.6 billion for Visa and MasterCard combined, according to the U.S. Chamber of Commerce.
“We are not expecting China to be a meaningful contributor to their growth, ever,” Morgan Stanley analyst James Faucette said of U.S. credit card companies, including Visa and MasterCard, which are still awaiting approval to set up networks.
Chinese shoppers have many payment options, Faucette said, and the cost for foreign companies to shift consumer behavior would “probably be prohibitive.”
China’s more than decade-long policy of blocking many foreign industries from its market is one of the frustrations that drove President Trump to ignite a trade war with Beijing. Together with Washington’s other complaints — about China’s theft of U.S. trade secrets and its massive state subsidy of industry — the protectionism shows that China isn’t willing to play fair, Trump argues.
“From now on, we expect trading relationships to be fair and to be reciprocal,” Trump said in May 2018, as his administration began slapping tariffs on Chinese imports in an attempt to force Beijing to change its ways.
Other Western industries that have faced big obstacles include banking, insurance, autos and cloud computing. Beijing keeps them at bay by denying them operating licenses, adopting regulation that favors domestic rivals and forcing them to work with a Chinese partner, Western business officials say.
Foreign card companies are allowed to process transactions for tourists visiting China and paying in foreign currency, and to market cards to wealthy Chinese for use abroad. But until recently there was no legal procedure for foreign companies to get licenses to process payments in China’s currency, the renminbi, and regulations forced Chinese merchants to favor UnionPay.
In the meantime, domestic payment options have taken off. Many middle-class Chinese say they are happy swiping their phones at checkout counters, with the WeChat or Alipay apps directly debiting their bank accounts without fees.
Beginning in 2017, popular shopping websites such as Taobao — which is owned by Alibaba, the parent company of Alipay — introduced installment payment options and credit lines of up to roughly $7,000. If shoppers still need to dip into revolving credit lines, there are always UnionPay credit cards.
Cathy Tu, an education consultant who spent time living in the United States and Britain before returning to Beijing in 2009 to set up her own business, has used most types of credit cards — Visa, MasterCard, American Express, and now UnionPay, which she says offers attractive rates and features, such as text alerts on every transaction.
“I think American credit card companies have little winning chance to compete against UnionPay in China,” Tu said. “The only credit card I use now is a UnionPay, with a moderate credit line. I don’t plan to apply for any more cards; it is too much trouble.”
There are some encouraging signs for foreign card companies. After decades of sky-high savings rates and thrifty spending, middle-class Chinese have become more comfortable borrowing money, with household debt soaring from roughly 20 percent of GDP in 2012 to nearly 50 percent in 2017, according to the German insurance company Allianz.
Those debt levels are still far lower than those of typical households in developed economies, and many Chinese, particularly in rural areas, complain about having to turn to so-called shadow lenders to get small personal loans because they don’t have access to credit.
American Express faces one last regulatory hurdle before it can start processing local transactions. After it sets up a network — by enlisting Chinese banks to issue American Express cards, and retailers to accept them — the company needs to win a final license before it can start doing business, said Fritz Quinn, the company’s vice president of corporate affairs in Asia.
American Express is establishing its network through a 50-50 joint venture with the Chinese firm LianLian.
“LianLian has local know-how. You really do need that in China,” Quinn said. He declined to say what sort of products the partners would offer — whether credit or debit cards or a mobile payment service. “It’s an incredibly competitive market,” he said. “Whatever we do has to embrace what customers want.”
Card companies’ fight to break into China boiled over in 2010, when the United States filed a complaint with the World Trade Organization, accusing Beijing of shirking its WTO obligations to allow foreign competition. The WTO sided with the United States in 2012, prompting China to promise to reform by 2013. But nothing changed for several more years.
During his first meeting with Chinese President Xi Jinping at Mar-a-Lago in April 2017, Trump repeatedly stressed the need for greater U.S. access to the Chinese market, according to the White House. Credit cards were among the industries included in a joint action plan that was to be executed within 100 days of that meeting.
A few months later, China issued regulations detailing how foreign card companies could apply for a domestic license. Visa, MasterCard and American Express applied.
“One of the things that actually came out of the Xi-Trump event in Mar-a-Lago was a commitment by the Chinese to actually produce those rules, and they did,” Visa chief executive Alfred F. Kelly Jr. said during an investor conference in early 2018. “China is a big country. It’s important. It’s going to be bigger and more important going forward. So my view is that we’ve got to be in this for the long term. We’ve got to be patient.”
When China’s foreign minister, Wang Yi, met with members of the U.S. business community in New York last September, the chief executives of Visa and MasterCard pressed their case directly with him, according to a person who was there and who spoke on the condition of anonymity to discuss a sensitive meeting.
Wang promised to follow up with regulators in Beijing, this person said.
But in late 2018, Chinese central bank regulators told a visiting American executive that the Visa and MasterCard applications were caught up in the two countries’ political wrangling and couldn’t be approved without a green light from the very top.
“This is not a decision any individual policymaker can make,” said a Beijing-based executive who spoke on the condition of anonymity to discuss private meetings with Chinese officials. “They said, look, because of the sensitive politics between the U.S. and China, it has to stabilize before we can move forward, given the political risk.”