China Removes Restrictions on Credit Card Overdraft Rates for over 700 Million Card Holders

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China’s central bank has removed restrictions on the overdraft rates for credit cards, in a major shake up for the country’s interest rate environment.

The Chinese central bank recently issued the “People’s Bank of China Notice Concerning Advancing Marketisation Reforms of Credit Card Overdraft Rates” (中国人民银行关于推进信用卡透支利率市场化改革的通知) to lenders throughout the country.

The Notice states that starting from 1 January 2021 the upper and lower bounds on credit card overdraft rates will be cancelled, with card issuers and card holders free to negotiate rates independently.

Just prior to the release of the Notice the annualised credit card overdraft ceiling had been 18%, while the lower bound was 12.6%, based on prevailing regulations.

Chinese analysts say the move is a major step for liberalisation of domestic interest rates, and could also come as a shock for consumer finance vehicles as well as virtual lenders such as Ant Group’s Huabei platform.

“At present whether it’s deposits or loans, in practice the upper and lower limits of interest rates have been liberalised,” said Dong Ximiao (董希淼), chief researcher at China Merchants Union Finance, to Diyi Caijing.

“As a key vehicle of consumer lending, interest rate pricing for credit cards should also be more market-based.”

Zeng Gang (曾刚), deputy-chair of the National Institution for Finance and Development (NIFD), said that while the upper and lower bounds of standard loan rates had been liberalised earlier and pegged to the loan prime rate (LPR), market reforms of credit card rates in China has lagged, and liberalisation of overdraft rates was a major step for overall liberalisation of interest rates.

Xue Hongyan (薛洪言), deputy-head of the Suning Financial Research Institute, said that credit card overdraft rates were likely to decline following the cancellation of restrictions in China.

Credit card issuance in China has surged in recent years, with central bank data indicating that as of the end of the third quarter of 2020 a total of 766 million credit cards and combined debit cards had been issued.

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