Visa and MasterCard may stand a greater chance of accessing China’s card payment market as Sino-American ties improve.
By Jane Tay
In November last year, the People’s Bank of China (PBOC) announced it would discontinue dual currency credit cards. This was a blow for Visa and MasterCard as they seek to expand in the Chinese US$8 trillion card payment market.
Beijing is protecting UnionPay’s dominance of China’s card payment market
PBOC needed to discontinue the issuance of dual currency credit cards as a way of stemming yuan outflows. Yuan outflows took up 36% of total outflows in September last year, Natixis’ estimate suggested. The renminbi weakened by more than 6% against the US Dollar, falling to an eight-year low.
But a large part of PBOC’s plan was to defend UnionPay’s position in the card payment industry. If PBOC keeps formidable foreign card networks out of China’s card payment market for at least a year, UnionPay can better consolidate its position “before Visa and MasterCard launch their independent operations,” said Kapronasia analyst Denis Suslov.
“With Chinese authorities still very influential in the marketplace, there is always the potential for authorities to attempt to intervene if they see UnionPay under threat,” said Tristan Hugo-Webb, Associate Director of Mercator Advisory Group’s Global Payments Advisory Service. PBOC’s move in November showed its willingness to intervene as it deems fit. UnionPay’s dominance of the card payment market allows PBOC to remain in a position of strength.
Beijing changed its tune merely six months later
PBOC started to ease control over yuan outflows only six months after it discontinued the issuance of dual currency credit cards. In April, PBOC put an end to the cross-border yuan payments processing protocol it introduced in January.
“Foreign reserves have stabilised this year after last year’s fall, worries over capital outflows have started to abate, and policymakers may contemplate loosening capital controls,” DBS Group Research’s report commented. This may explain the PBOC’s sudden change of heart.
Abating capital outflows were unlikely to be a result of PBOC’s regulatory move in November last year. The regulatory move would not have any substantial effect because most dual currency cards are valid until their expiry.
Visa and MasterCard, along with other foreign card companies, are still left out of China’s card payment market. This may not carry on for long.
Beijing’s treatment of Visa and MasterCard coincides with chilly ties with the Obama administration
The exclusivity of China’s card payment market to UnionPay came under threat in 2012. The World Trade Organisation (WTO) ruled in favour of the US and deemed China guilty of discriminating against US bank card firms.
Beijing was obliged to open its card payment market to foreign card firms under the ruling. But it had been dragging its heels on meeting this obligation. After demurring for nearly four years, the Chinese government announced foreign companies are allowed to set up their payment clearing businesses this year. Even then, it made sure to attach stringent entry requirements to foreign companies.
Beijing’s sluggishness coincided with frosty ties with the US. The Obama administration had been ready to voice its dissatisfaction towards Beijing’s policies; whether its human rights record or its belligerence in staking maritime claims.
President Donald Trump is not leaving US-owned card payment firms behind
President Trump made an electoral promise to ensure the “US Treasury’s designation of China as a currency manipulator.” But the US Treasury fell short of doing so and merely criticised Beijing for its “long track record of engaging in persistent, large-scale, one-way foreign exchange intervention.” President Trump is most likely dampening his words to leave room for cordial negotiations with Beijing.
There is good news for US card companies now. President Trump has not forgotten about them. During the 100-day plan talks, Beijing agreed to put out guidelines, by 16 July, that would enable US-owned card payment firms “to begin the licensing process” in China’s card payment sector.
PBOC put out the guidelines on 30 June, meeting the 16 July deadline.
Visa and MasterCard have only just taken the first step
It is too early to tell whether Visa and MasterCard have a guaranteed entry to the Chinese market. Chinese industry officials estimated US firms would need at least another two years to compete with UnionPay on a levelled playing field. Before that, PBOC may take as long as 15 months just to review firms’ applications.
There is room for optimism. Several analysts saw the 100-day plan as a sign of political goodwill. China has also demonstrated its commitment to other terms agreed during the talks; China purchased US beef for the first time after a 13-year hiatus.
Alfred Shang, a financial services partner at Bain & Co, commented, “Increasingly, China UnionPay is competing on a global scale. They will need to play along with the global rules. They are trying to strike reciprocal rules with other payment networks around the world, so they need to be seen as playing by the rules.” China’s financial influence stands to gain if Beijing meets its promises to Washington. Beijing needs to do as the Romans do when in Rome; Beijing and Chinese companies have greater credibility if they comply with WTO rules. Giving US card payment firms entry to its market is the first step.