The People’s Bank of China has ordered the country’s banks to stop issuing credit cards that allow customers to transact purchases in dual currencies, in the latest move to plug regulatory gaps and stem capital flight while the renminbi continues to sink to an eight-year low.
Credit cards issued in China with Visa or Mastercard must be replaced with those issued by the country’s dominant currency clearing company China UnionPay Co when they expire, according to a November 23 report in the Communist Party’s mouthpiece People’s Daily newspaper, citing a recent undated meeting called by the central bank with Chinese lenders.
Existing cards that offer dual-currency services can continue until their expiry, the newspaper said. Under new regulations, credit cards can be issued for either yuan-denominated transactions, or enabled for purchases in hard currency, carrying UnionPay’s logo. Visa and Mastercard must apply separately to commence credit card businesses in China.
“These moves appear to be part of the continuing clamp down on capital outflows,” said Keith Pogson, a partner in EY’s financial services practice in Hong Kong.
Dual currency services have been a feature among the credit cards issued by the Industrial Commercial Bank of China, China Construction Bank, Bank of Communications, Pudong Development Bank, China Merchants Bank and scores of other mainland-based lenders for at least 14 years.
The service enable Chinese consumers to shop overseas, using the worldwide network and currency clearing services operated by Visa and Mastercard, while UnionPay nurses its nascent service within mainland China. As UnionPay grows in size, and expands outside China’s shores to make the renminbi accessible and usable, the second logo on the credit card becomes expendable.
The change has become more urgent this year, as the renminbi has weakened by more than 6 per cent against the US Dollar to the lowest in eight years.
As much as US$728 billion worth of capital has left China so far this year, according to the French bank Natixis’ Capital Flow Tracker data, with US$246 billion in outflows in the third quarter.
The third quarter also saw a large increase in the amount of yuan-denominated outflows, which made 36 per cent of the total outflows in September, according to Natixis.
To stem the prospect of a capital flight, China’s currency regulator and the central bank took action.
In October, the State Administration of Foreign Exchange, the currency regulator, imposed a ban on UnionPay’s use for buying insurance and “investment-related products” in Hong Kong.
“The authorities are just moving through, looking for all different loopholes that allow individuals to transfer large sums of money overseas,” said Pogson.
China’s credit card market is currently going through a period of transition.
The People’s Bank of China published rules in June to allow foreign payment card companies to operate on the mainland. Mastercard’s president of international markets Ann Cairns told Reuters in July that the company was hoping to enter China as soon as possible.
Chinese bank card transactions reached 55 trillion yuan (US$7.9 trillion) last year, according to the People’s Bank of China.
The latest rule gives the home-grown UnionPay a leg up, as it prepares for competition with the foreign brands before they commence service in China.
“The idea is to get rid of dual-brand cards before Visa and Mastercard launch their independent operations,” said Denis Suslov, an analyst at Shanghai-based financial industry consultancy Kapronasia. “These new regulations help UnionPay better position itself before the market opens to foreign competition.”
A spokesperson for Visa declined to comment to inquiries from the South China Morning Post about the new regulations while Mastercard did not respond to a request for comment.
Additional reporting by Daniel Ren, Maggie Zhang and He Huifeng.
Article source: http://www.scmp.com/business/china-business/article/2049280/china-orders-banks-stop-issuing-dual-currency-credit-cards