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. Last Updated: 07/27/2016

'Credit Card Slaves' Suffer in Taiwan

TAIPEI, Taiwan -- Kathy Chen is an accessories shopowner in Taiwan struggling to pay huge credit card debts on a modest income.

She is the new breed of "credit card slave."

Hundreds of thousands of Taiwan's credit card holders have racked up mountains of debt, undermining consumer sentiment and underlining the risks facing export-led Asian economies that are trying to crank up domestic consumption as an engine of growth.

Besides Taiwan, where American Express stopped issuing credit cards this year due to rising defaults, Thailand and China are among those that have tightened supervision to avoid the experience of South Korea, where the bursting of a consumer credit bubble badly winded the economy in 2004-05.

"I wanted to commit suicide because I was at a loss what to do to my credit card debts," said Chen, echoing the sentiments of a growing number of desperate borrowers.

She is trying to keep up payments on the 5 million Taiwanese dollars ($157,233) she owes banks on a monthly income of only 20,000 Taiwanese dollars ($633).

"I have no money and I have so many debts. Nowadays, I only spend on three square meals a day and basic necessities," said Chen, 40, who tries to hide her face in public by wearing a hat, huge sunglasses and a mask covering her mouth.

Chen is one of 520,000 so-called card slaves, or problem debtors, out of Taiwan's total population of just 23 million.

Their overdue debts, averaging 300,000 Taiwanese dollars per person, are the dark side of a boom in Asia's credit-card market, which is growing more than 10 percent per year as issuers such as Visa and MasterCard tap an exploding middle class.

Visa, which features actors Richard Gere and Catherine Zeta-Jones in its advertisements across Asia, said it had issued more than 202 million consumer credit cards in Asia by the end of 2005, up 11.5 percent from a year earlier.

Easier access to credit enables Asian consumers to smooth out their consumption, but analysts and industry executives fret that the ready availability of cash advances from banks eager to grab market share could create borrowing bubbles.

In Taiwan, where shoppers are bombarded with flyers offering credit cards with low interest payments, each person has 4.9 cards on average. South Korean adults have more than three.

"It's like a drug addiction. The advertisements always look so attractive and people keep applying," said Chien Hsi-chieh, president of the Alliance of Fairness and Justice, a grouping of non-profit organizations that helps debtors negotiate with banks.

"But many people end up in debt because they fail to read the fine print," Chien said.

To tackle the problem, the government has launched a bail-out scheme for big debtors and is drafting a credit-scoring system so lenders can review a potential borrower's financial profile.

The Financial Supervisory Commission believes credit card risks are gradually easing and should not be a major issue after July. The number of credit cards in circulation has fallen to 43.7 million in March from 45.8 million in September. The outstanding balance of revolving card loans has been dipping, too, and dropped to 460.4 billion Taiwanese dollars in March.

But Vice Premier Tsai Ing-wen warned recently: "We're not out of the woods yet."

The lesson from South Korea, in particular, is that developing economies with immature credit- and cash-card markets must be wary of borrowing bubbles that, when they burst, can badly hit growth.

Daniel Hui, an economist with JPMorgan Chase, noted in a report that credit card debt in South Korea fueled an explosion in annual personal consumption growth, from 2.0 percent in the first quarter of 2001 to 9.8 percent a year later.

While South Korea's domestic consumption is recovering now that the hangover from the credit binge has largely worn off, Taiwan's woes are just starting to take a toll on retail spending.

Taiwan's imports of consumer products posted a rare fall in March from a year earlier as credit card problems dampened consumer sentiment, Finance Ministry officials said.

Duncan Wooldridge, senior economist at UBS, expects Taiwan's domestic consumption, which makes up 60 percent of gross domestic product, to grow 1.5 percent this year, half of the government's forecast of 3 percent and half of the likely pace in South Korea.

"Increasingly, the signs are suggesting that consumption will more likely disappoint consensus expectations and government expectations," Wooldridge said.

Hui at JPMorgan was more optimistic, arguing that consumers have used Taiwan's new cash cards as a substitute for other credit sources. As such, removing that driver of spending is likely to have a limited impact on overall spending and growth.

"To be sure, certain more exposed individual lending institutions will suffer significant hits to their loan books. Still, the outlook for the financial system as a whole remains sanguine," Hui wrote.