It is hard to imagine now but when China acceded to the World Trade Organization more than 17 years ago, China UnionPay did not exist. The state-owned card payments monopoly was created in March 2002, three months after the WTO formally welcomed the country as a member.
Almost two decades later, Visa and Mastercard’s wait to pass through the gates to enter the world’s largest card payments market seems set to end. It is inconceivable that US president Donald Trump would sign off on a trade deal with Beijing that did not finally resolve the impasse.
But when the US card companies finally do enter China, they will confront a radically different market from the one that beckoned in December 2001. And unfortunately for many other multinationals, their frustrating China experience is not an unusual one. In industry after industry, foreign companies have been allowed in only after local champions have secured unassailable positions — or after new technologies and competitors have totally changed the market landscape.
China’s moves over the past year to liberalise its financial sector, by raising or eliminating foreign-investment caps for insurance companies and brokerages, is a classic example. Ten or 15 years ago, such market access reforms could have given overseas finance companies a real opportunity to establish themselves in China. Instead, the delay gave their domestic competitors time to consolidate dominant market positions.
As one senior western finance executive told the Financial Times: “I must be really bad at my job because I’ve been coming to China for almost 30 years and if our operations here disappeared tomorrow, it wouldn’t make a bit of difference to our global business.”
Visa and Mastercard were doubly cursed. Had they been allowed to enter the Chinese market in 2002 — as the WTO later ruled they should have been — they might have been able to give UnionPay a run for its money in the race to provide China’s emerging middle class with branded debit and credit cards.
Instead the Chinese government protected UnionPay’s monopoly. It was not until 2010 that the Obama administration finally challenged Beijing’s discriminatory treatment of foreign electronic payment providers, with a WTO ruling in Washington’s favour coming two years later.
China ignored the WTO ruling and seven years later, Visa and Mastercard are still locked out. And when they are finally let in, UnionPay will be the least of their problems.
Since 2012 Alibaba’s Alipay and Tencent’s WeChat Pay “e-wallets” have become ubiquitous. It is not just millennials who pay for pretty much everything with a flick of their smartphones rather than using their UnionPay bank card, which involves a wait for the vendor to swipe it, entering a pin number and another wait for a printed receipt to sign. In China, using a card has become almost as quaint as writing a cheque.
According to Worldpay, credit and debit cards accounted for less than 15 per cent of all online payments in China in 2017 compared with a 62 per cent market share for e-wallets such as Alipay or WeChat Pay.
Even bank transfers, now done easily via smartphones, are set to overtake credit cards as China’s second most popular payment option by 2021, when the country’s e-commerce market will be worth an estimated $1.6tn.
For foreign investors, the same dynamics are at work in the Chinese market for electric and other “new energy” vehicles. As part of the China-US trade talks, Beijing has highlighted its plans to eliminate government subsidies for domestic NEVs while also finally allowing foreign carmakers to wholly own China-based manufacturing operations.
“Having used mercantilist tactics to build local champions, China is tapering off some subsidies and restrictions,” Nigel Cory and David Hart at the Information Technology and Innovation Foundation said in a recent note. “Building these local champions at the early stage of technological development and adoption means China will be well placed to capitalise on other countries’ efforts to reduce carbon emissions and spur NEV adoption.”
Chances are that many other Chinese market access concessions offered up in the trade talks will be similar exercises in letting US companies into the stable only after all the horses have bolted. Mr Trump should think twice about hailing such offers as “big progress”, as he is wont to do, when it comes time to accept or reject a final trade deal.
