China Removes Limits on Credit Card Interest Rates

China’s central bank removed the upper and lower limits on credit card interest rates starting Jan. 1 as part of a strategic move to let markets set rates. The measure could foster greater competition between conventional banks and fintech rivals, lowering costs for borrowers, industry experts said.

Under the new policy, credit card issuers can set their own interest rates for unpaid monthly balances, also known as overdrafts. Previously, the upper limit was a daily interest rate of 0.05%, equivalent to an annualized rate of 18.25%, and the lower limit was 0.7 times the upper limit, or an annualized 12.775%. According to a notice issued in late 2020, credit card operators must fully disclose annualized interest rates and ensure that card holders know and accept the rates.

The move is a signal that regulators are trying to help credit cards regain mainstream status in the consumer credit market, analysts said. Removal of the interest rate caps will have little impact on bigger credit card providers but is expected to benefit smaller issuers, a credit card executive at a big bank told Caixin. With flexible interest rates, smaller banks can appeal to customers by introducing differentiated credit card products, the executive said.

The new policy may also encourage competition from internet and tech giants seeking to leverage their huge customer bases to generate more revenue and profit by offering consumer credit, industry experts said. A wide range of platforms large and small have ventured into consumer financial services, including Ant Group, is 33% owned by e-commerce giant Alibaba Group Holding Ltd.; ride-hailing company Didi Chuxing Technology Co. Ltd.; e-commerce platform and online retailer JD.com Inc.; smartphone maker Xiaomi Corp.; and online discount retailer Vipshop Holdings Ltd.

While the policy change is intended to encourage consumers to choose credit cards, the final result may be a two-way choice, some bankers said. When deciding credit card interest rates, banks should see whether their risk control policies can manage high-risk customers. On the other hand, the choice by young users between credit cards and online platforms will also depend on factors such as credit habits and convenience, the bankers said.

The 10 biggest banks currently command about 98% of China’s credit card market. As online platforms such as Ant Group’s Alipay start to help hundreds of millions of users take out small loans, small banks have been squeezed out of the credit card market.

Most popular online lending platforms charge the former credit card upper limit of 0.05% daily. With the removal of the limit, banks are likely to lower their rates to compete with online credit platforms, said credit card industry analyst Dong Zheng.

Meanwhile, waning corporate loan demand and regulatory curbs on banks’ lending to the real estate sector are leading banks to expand their retail loan business.

In countries with fully market-oriented interest rates, banks can work out different credit card rates according to users’ credit scores to meet the needs of different user groups, Dong said. For example, interest rates on U.S. credit cards range from 11.99% to 29.49%, depending on the user's credit status. In Taiwan, users with good credit status can have overdraft interest rates as low as 5%–6% annually, while users with poor credit status can pay rates as high as 19.71% annually, Dong said.

Now smaller banks could introduce zero overdraft interest rates to grab users from online platforms, similar to certain platforms’ marketing strategies, said a credit card business executive at a city commercial bank.

Regulators have been happy to encourage the development of online financial services by well-known tech companies to help drive the government’s policy of inclusive finance.

At the same time, Chinese regulators ordered fintech giant Ant Group to overhaul its consumer credit business after they abruptly halted the company’s plans for a record-breaking initial public offering late last year.

But the suspension of Ant’s potentially record-shattering $34.5 billion IPO in Shanghai and Hong Kong sent shockwaves through the fintech industry as China unveiled a stricter regulatory framework to control financial risks and further protect the rights and interests of consumers.

China’s financial regulators issued draft rules in November stipulating stricter standards for a range of operational and financial metrics including leverage levels, joint lending and cross-province business.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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