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NUS studies: Disguised corruption in China through credit cards

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Some banks in China have been issuing bureaucrats with higher credit lines than those given to non-bureaucrats, until the recent crackdown on corruption in the country, suggesting that credit cards have been used as a disguised form of corruption, according to fresh research by Professor Sumit Agarwal ([email protected]) of the Department of Finance at NUS Business School.

According to the Asian Bureau of Finance and Economic Research (ABFER) Digest in September 2015, the study covered all provinces in mainland China and credit card data of close to one million consumers.

The research found that Chinese banks issued credit lines that were on average 14 percent higher than those they issued to non-bureaucrats. This credit premium was also almost 18 percent greater among higher-ranked bureaucrats, compared to those ranked lower, indicating that banks favored bureaucrats who had more power to help them in their operations.

Additionally, the study found that even though bureaucrats had higher average delinquency rates compared to non-bureaucrats, the delinquent accounts of bureaucrats had a higher probability of being reinstated, than those of non-bureaucrats.

A noteworthy finding was that while regular customers with delinquent accounts paid off their debt quickly to avoid high interest charges and to be reinstated, delinquent bureaucrat accounts took a longer time to be reinstated, suggesting that the latter achieved account reinstatement only when banks wrote off the debt.

However, the crackdown in corruption appears to have had an effect. The study found a smaller difference between the credit line premiums of bureaucrats' credit card accounts in the first year after the crackdown, compared to bureaucrat accounts that were opened prior to the crackdown.

The delinquency rate and likelihood of reinstatement for existing and new bureaucrats' credit card accounts also fell during the first year after the crackdown, making them no different from accounts of non-bureaucrat customers.

"The lack of transparency and governance in China's credit card system makes it a potentially important and viable vehicle for corruption. It can potentially be used as an implicit bribe to government officials. Our research is significant as it not only shows that the corruption crackdown has had a good effect, it has also revealed a corruption mechanism that may have been missed by policymakers," said Professor Agarwal.

The abstract can be downloaded at: http://abfer.org/docs/abfer-sept-digest-2015.pdf