China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

Scope - The payment services include: (1) internet payment; (2) the issuance and acceptance of prepaid cards; (3) credit card acceptance; and (4) other forms of payment services recognized by the PBOC.

Competent Authority - The new regulations show that the PBOC authorities intend to regulate non-financial institutions which act as payment intermediaries.

License Required - To date, pre-paid cards and internet payment have been left largely unregulated in the PRC. The new regulations require any non-financial institution that offers such services to obtain a payment service business license (“PS”). The PS license will be issued by the competent local PBOC branch (i.e. the sub-provincial city center branch).

Prerequisites for a PS License- Application requirements include: (1) meeting minimum registered capital requirements (i.e. not less than 100 million RMB for companies providing payment services nationally; not less than 30 million RMB in autonomous regions); (2) being profitable and providing e-commerce information technology service for at least two years; (3) having more than five senior employees familiar with payment services business; (4) meeting payment services business facility requirements; and (5) having sound organizational structure, internal control systems and risk management measures.

PS License Application Documents - Requisite application documentation include: (1) written application detailing plans for payment services; (2) business license; (3) articles of association; (4) capital verification certificate; (5) audited financial statements; (6) business payment feasibility study report; (7) anti-money laundering verification; and (8) technical safety testing and certification.

Possible Sanctions- Failure to comply with the new PBOC regulations may result in revocation of the PS license and/or fines. Furthermore, any illicit criminal activities (i.e. money-laundering or fraud) will be reported to the relevant authorities for further action.

Practical Implications - The new regulations will potentially impact retailers in two ways. Firstly, retailers using prepaid cards (i.e. store cards, gift cards, value-added cards, etc.) will need to ensure that the card issuers have obtained a PS license. Secondly, retailers with an online presence will need to ensure that third party vendors meet the necessary requirements and hold a valid PS license under the new regulation.
 

The move is no doubt part of a broader effort by the government to boost domestic consumption as an engine of delivering growth as outlined by the State Council in its policy “to maintain growth, adjust structure, promote reform and benefit livelihood".

The CBRC issued the Pilot Management Measures for a Consumer Finance Company (“Pilot Measures”) on July 22, 2009. The hope is that the establishment of consumer credit companies will promote domestic consumer demand and support sustainable economic development.

The PRC has (possibly luckily) missed out on the easy credit boom seen in much of the West (and also parts of Asia). The “consumer financial companies” outlined in the Pilot Measures refer to non-bank financial institutions established within the PRC and subject to CBRC approval. Crucially such companies are prohibited from taking deposits from the public. Such consumer credit companies are to provide small-amount loans according to the Article 2 of Pilot Measures. The consumer credit companies will offer personal loans for the purposes of travel, education and durables (i.e. electrical home appliances and IT products).

According to the Pilot Measures, the main shareholder in a consumer financial company must be a financial institution (can be domestic or overseas). Shareholders will also need to obtain CBRC approval and are subject to meeting certain conditions (i.e. overseas financial institutions must have had a representative office in China for more than two years or established a branch and have a sufficient analysis and research capability within China; the financial monitoring authority in their home country must have a good cooperative relationship in place with the CBRC in respect of administration and supervision). We understand that at present no foreign financial institution or foreign investor has been approved by the CBRC but the regulations do clearly allow for such possibility.

It is interesting to note that Bailian, one of China's largest retail conglomerates, is a shareholder in one of the recently established consumer credit companies.
 

Summary

Time will tell whether the growth of consumer credit in China will lead to a mountain of consumer debt as is the case of US and Korea or whether Chinese consumers will continue to pay off their bills on time much to the chagrin of their financiers. In any event the new developments are a further indication of China seeking to use domestic demand as an engine of growth rather than relying solely on exports. Foreign retailers and financial institutions are likely to closely monitor the opportunities that arise for them as credit becomes a more common part of consumer life.