Need cash in a hurry in China? You can use your credit card for that -- just don't tell the central bank.
With the Chinese economy slowing, businesses of all stripes are finding themselves short of cash. The banks are proving more reluctant to lend to small and private firms, companies are delaying payment of goods they bought on credit, and the slowing economy means that sales just aren't as good as they used to be.
So companies are turning to their credit cards. Some people with point-of-sales -- or POS -- machines will offer to swipe your card, racking up a sale, but instead of handing over the goods they give you cash. They take a small fee, and you get -- for all intents and purposes -- a bank loan.
This is not exactly new. The People's Bank of China warned about it late last year. But anecdotally, it's becoming more visible in Beijing. One China Real Time reporter started receiving the occasional advertisement in his bicycle basket from outfits offering such services earlier in the year. But yesterday, a bicycle parking lot where he occasionally leaves his bike got spammed with advertising from three different service providers. Given the practice is illegal, that's kind of a lot.
So, how does it work?
Think of it as an interest-free loan -- well, almost. After you swipe your card and receive your cash, you have about 50 to 60 days before the banks starts calculating interest on the amount you've charged. But if you've got multiple credit cards, you can rollover that amount indefinitely. When the bill on the first card comes due, you just go back to your friendly credit-card-fraud enabler who will swipe your next card and give you the cash needed to pay off the first bill.
But if you only have one card, or you've already maxed out your others, the person with the POS machine can provide a ultra-short term loan, giving you enough cash to pay off the credit card bill, allowing you to borrow interest free again right away. The expectation is that once your credit card debt is set to zero, you'll immediately repay your agent by swiping your card again on his POS machine.
A couple of people who provide the cash-out service told China Real Time that they charge a 1% fee for transactions of more than 10,000 yuan, and flat fee of 50 yuan for anything less than that. One person charged a fee of 0.1% to pay off credit card debt, and the other 1.2% -- not a bad return given the loan is only for a few days. If you rollover the debt for an entire year, that means you're probably paying between 6% and 8% on what you borrow. That's still lower than what the bank would offer, if it's even willing to offer a loan.
It's impossible to say how widespread the practice is, but it's common enough to have attracted the regulator's attention. In November, the Nanchang branch of the People's Bank of China issued a notice warning that using credit cards to draw cash from fake transactions is illegal and that it 'contaminates society's morals' by undermining the good faith on which market transactions are based.
Money raised this way 'flows into the stock market, gambling, speculation and into companies' working capital,' the statement said, adding that loans to companies should be backed by collateral and guarantees.
The central bank expressed similar concerns earlier this week that funds extended by banks as personal loans were ending up in speculative activities
With cash hard to come by, society could find its morals being contaminated by similar practices for some time to come.
Josh Chin/The Wall Street Journal