You can travel halfway around the world, but you can't escape your past. That's the unfortunate lesson one student recently learned when he tried to dodge his debts.

Two years ago, Hao Bing flew to Germany to start five years of studies with about 5,000 yuan (US$617) unpaid on his credit card.

His bank was unable to reach him, and he assumed he had beaten the system.

But reality has caught up with him. Hao never imagined he would be put on a credit blacklist established last year by China Unionpay, the sole national payment network for Chinese banks.

The company regularly updates the list based on information compiled from every domestic bank in the country. If a person's name appears on the blacklist, their credit rating will be ruined and their chances of getting another credit card in China will plummet. Car and housing loans will be out of the question.

The blacklist helps the commercial banks to lower market risks when issuing credit cards, says Zeng Zhuo, a senior manager at China Minsheng Banking Corp.

"Lenders actually need even more safeguards than just the list," she says.

The lack of an integrated national credit information system with accurate individual financial records is the top headache for most commercial lenders in China, she says.

Although Minsheng's credit business has been booming since the bank launched its new credit card two months ago, the absence of a regulatory framework is a huge obstacle to further expansion, Zeng says.

Credit industry players and China Unionpay are actively working together on the problem. The central bank established a basic database of individual credit information collected from domestic commercial banks across the nation about eight months ago.

The database was put to use late last year in seven pilot cities, including Beijing and Shenzhen.

The government is expected to expand the network across the country this year, but the system is still not sophisticated enough and is unable to meet the demands of commercial lenders, says Wang Jing, a credit manager of a Beijing-based joint stock bank.

The system focuses on three key areas: personal information (such as names and addresses), bank loan records and credit card information such as card issuers, credit lines and payment histories.

The individual payment histories for phone, water, electrical and gas bills need to be collected because they can provide rich data when evaluating individual credit ratings, Wang says.

In most developed markets, only those with positive credit ratings can apply for loans and credit cards. This is why a national credit information system can help commercial lenders avoid risk, effectively assess customer credibility and improve efficiency.

The integrated system established in Taiwan Province enables credit managers to check credit information during the customer interview process, says Zeng. This helps banks make decisions and determine individual credit limits.

"If there is a national system with sufficient credit information, we can increase our market share," Zeng says.

Technological difficulties are slowing down the establishment of this network on the mainland, says an official at China Unionpay who requests anonymity.

There are other problems. Information on China's 1.3 billion people is scattered across a range of government departments and non-governmental institutions such as commercial banks. Compiling information for a comprehensive network is a formidable task.

Cost is also an issue. Information gathering and network maintenance require huge amounts of capital.

At the moment, China Unionpay's blacklist is free for members. The central bank's system will initially be free for all commercial lenders but a fee will eventually be introduced.

There are legal hurdles to overcome as well. There are currently no laws in China regulating the collection of individual credit information. There are numerous privacy issues to consider when dealing with such sensitive information.

There is no law specifying what kind of information could be open to market institutions, and how it would be provided and protected.

Actually, all the commercial banks and some private institutions are collecting this kind of information and creating their own credit rating system, the official says.

The commercial banks, however are not willing to share their information with each other.

Some experts say the slow progress on the system is likely due to the fact that credit market risks have yet to surface on a large scale in China.

The credit card sector has enjoyed rapid development, with the number issued jumping from 1.55 million at the end of 2002 to a current level of over 10 million, according to figures China Unionpay made public this year.

But credit cards are still a relatively new thing in China, says John Harker, regional director for Asia Pacific of Experian, a prominent international credit rating agency and service provider.

Most credit cards are currently issued to high-income customers, which has thus far minimised risks, he says.

In China, only one person in 130 has a credit card. In South Korea, where there has been a serious credit card crisis, most people have an average of 1.96 credit cards.

According to a recent survey by VISA, there is potential for 30 million to 60 million card users in China. VISA predicts that by 2010 there will be 200 million middle-income earners ready to establish individual credit lines, but so far only about 10 million cards have been issued across the country.

In the meantime, Chinese consumers are developing a strong appetite for plastic, especially the younger generation. Domestic banks have rushed to improve the banking infrastructure and have begun to offer short-term credit loans. Chinese consumers are set to adopt credit services at a rapid pace.

As the market continues to swell and competition between card issuers heats up, more and more cards will be issued to middle-income earners, a huge demographic with big profit potential, says Harker.

If China can establish a risk management system and employ advanced credit rating technologies, a healthy and booming credit card market is guaranteed, he says.

(China Daily 08/01/2005 page4)