Chinese credit cards: Guangdong's confidence should encourage foreign interest

Guangdong Development Bank reportedly hopes to double credit card profits in 2006.

Having broken even in 2004 and become the first Chinese bank to move into the black in the credit card business in 2005, Guangdong Development Bank is hoping to double

its earnings in 2006. This first tangible example of profit making coupled with Guangdong's desire to secure a foreign partner is sure to generate significant interest from abroad.

The Shanghai Daily reports that China's 11th largest lender Guangdong Development Bank (GDB) is expecting a 'huge' increase in its credit card earnings in 2006, following what it sees as a pick up in momentum in the credit card sector in China.

The revelation has important implications for foreign banks eyeing the market, as it offers potential investors a lucrative opportunity in a geographical sector where product options are limited. Restrictions on foreign banks entering the Chinese market make it difficult for them to offer anything other than basic banking and loan products.

Like other Chinese banks GDB has some problems with non-performing loans (NPL) and Lu Shifeng, general manager of credit cards at GDB, told the Shanghai Daily that the bank's NPL ratio was almost 2% in 2005. As a result, GDB wants to align with a foreign investor with deep pockets to underpin its standing.

However, apart from a vast customer base, the fact that in credit cards the bank has had fewer problems than in its overall loan portfolio will also interest potential overseas partners. Furthermore, GDB reportedly has 2.8 million credit cards on issue in the market. And after becoming the first Chinese lender to report a profit from the sector in 2005, the bank expects a major surge in revenues this year.

Credit cards are one product that foreign players can get involved in and, in addition to the opportunities that such a large market promises, this news is the most tangible indication yet that the credit card market in China can provide a lucrative return. It is therefore not surprising that Guangdong already has a long list of suitors at its door in the form of foreign banks such as Citigroup

Card Providers Target China

Card providers target China

In China credit cards (and even debit cards) are a relatively new phenomenon as traditionally, people choose to pay in cash; 66% agree with the statement “I like to pay cash for all purchases”.
Chinese people are traditionally very cautious about being in debt and the emphasis is on “saving” rather than spending. However three years ago 73% agreed with the same statement. As the Chinese get richer, they seem more comfortable with taking on debt.

Use of credit cards is proportionally tiny in China and use of debit cards is much higher at 40%, but both are expected to grow in future years.

The majority of card owners use a Chinese local debit/credit card. However, there is a niche of very wealthy businessmen and higher income Chinese who are becoming more attractive to companies like Visa and American Express. The volume of advertising from Western credit card companies would seem to back this up.

In terms of future potential, statistics published by the People’s Bank of China in 2001 show that the number of cards issued by the banks has increased by 64% each year. The total sum of transactions has increased by 76% per year, and the number of retailers who accept the cards has grown by 51% per year.

Credit Cards will be widely used in China

Online shopping is a common thing in the most of western countries.

Shopping is an interesting thing, but what if you don't have cash or avaiable fund on your bank account? To do this, you must have a card indicating that you have been granted a line of credit. It enables you to make purchases or withdraw cash up to a prearranged ceiling. The credit granted can be settled in full by the end of a specified period or can be settled in part, with the balance taken as extended credit. Interest is charged based on the terms of the credit card agreement and you are sometimes charged an annual fee.

According to a latest survey by ACNielsen credit card (standard credit card and quasi credit card) markets in Beijing, Shanghai and Guangzhou develop quickly. Credit card penetration rate has increased from 18 percent in 2003 to 22 percent this year. China is changing from "cash payment era" to "credit card era".

ACNielsen conducted a telephone survey on more than 2,700 people between 18 and 54 in Beijing, Shanghai and Guangzhou in order to study the attitude of China's different consumer groups on main personal financial products such as personal bank, credit card, personal loan, life insurance and personal investment and how they are used. This way the growth opportunity of personal financial market could be explored and reflected.

An analysis by age group shows that consumer group between 25 and 34 have the highest credit card possession rate, with persons who have one or more credit cards reaching 35 percent. Of the three cities Beijing has the highest penetration rate among the age group, about 39 percent people have at least one credit card.

Among the many credit cards issued by Chinese and overseas banks ICBC's (Industrial and Commercial Bank of China) Peony Card is the most popular, which enjoys a possession rate of 13 percent. CCB's (China Construction Bank) Long Card and BOC's (Bank of China) Great Wall Card follow it with possession rates of 9 percent and 6 percent respectively.

Credit Cards In China

The growing market for credit and debit cards in China, Not only does it consider the new developments in the banking and finance industry as they relate to credit cards, but also maps the latest developments in tie-ups between international card brands and the Chinese banks. The growing use of credit cards, and affecting the retail and Internet market in China, both B2B and B2C.

Market Definitions

2001 is seeing a major push by the foreign banks to establish and extend their operations in China before WTO. Similarly, local banks are attempting to modernise and extend their operations in order to better compete in the new regulatory climate.

China launched its first credit card in 1985. The issuer was the Bank of China and the card was called the Great Wall Card. The Great Wall Card became a member of Visa in 1987 and began issuing the first international credit cards in China in 1988.

This report covers the emerging market in China for credit cards. There is some reference to the new store cards and IC cards, though the main focus is bank-issued credit and debit cards and the activities of the international payment settlement companies such as Visa and MasterCard.

Key Facts

- According the People's Bank of China's statistics, since the Bank of China issued its the first credit card in 1985, Chinese banks have issued over 140 million cards. - The number of cards issued by the banks has increased by 64% each year. The total sum of transactions has increased by 76% per year, and the number of retailers who accept the cards has grown by 51% per year. - The number of card-issuing banks has increased from the initial four state-owned commercial banks to over 20 banks. Meanwhile, the percentage of retail purchases using bankcards also has been on the rise. Last year, it grew to nearly 10% of all retail sales revenue

Core Contents

- Details of the credit card industry structure in China, its history and development in terms of acceptance and types of cards. - Credit card statistics up to 1999 including total market size and ranking of card issuers - Debit card issuers and their statistics - Current issues including legislation, credit checking, bank deposits tax, charity cards, debit cards, store cards, IC cards, smart cards, internet cards, ATMs and payment gateways. - End user analysis including consumer profiles and marketing activity - SWOT analysis on China’s credit card sector. - Profiles of over 50 companies involved in China’s insurance market Full forecasts 2000-2004
Company Coverage

Agricultural Bank of China American Express Bank of China Bank of Communications China Construction Bank China Merchants Bank CITIC Industrial Bank Guangdong Development Bank Industrial & Commercial Bank of China JCB MasterCard International VISA International

China's slumbering financial cards industry shows signs of awakening

China's slumbering financial cards industry shows signs of awakening

In 2003, financial cards in China posted a whopping 34% growth in terms of the number of cards in circulation. Financial cards in China has been and remains fairly underdeveloped. This is despite the fact that financial cards were launched in China as early as 1986. Various obstacles have impeded the development of financial cards in the country, ranging from low levels of disposable income, lack of consumer sophistication, and the lack of a unified infrastructure, to name but a few.

It was only in 1993 that a concerted effort was made to rouse China's slumbering financial cards industry. That year, then-president Jiang Zemin launched the Golden Card Project with the objective of speeding up the construction and reformation of China's finance and trade through encouraging the increased usage of financial cards in general and credit cards specifically. Since then, banks, card operators and the relevant government authorities have worked in tandem to develop China's financial cards industry and this has been achieved to a large extent through the passing of regulations to ensure the development of a structured financial cards industry.
As at 2003, China has financial cards – debit, credit and charge – which can be used globally instead of being restricted to domestic use only. Chinese consumers also have the true option of having a revolving credit line and are able to settle their outstanding balances in either RMB, US$ or HK$. In the past, outstanding balances on cards typically could only be settled in foreign currencies.

China's accession into the World Trade Organisation in 2002 meant that the financial industry in the country truly had to open up and undergo reformation as part of the deal. In 2002, China UnionPay was set up by a group of financial institutions. Backed by the Chinese government, the organisation's aim is to unify the financial cards network in the country such that all cards can be used nationwide. China UnionPay has worked hard towards this ultimate goal. It is slated to be fully realised in 2004.

Debit cards dominate but credit cards most dynamic

In 2003, debit cards continued to account for the bulk of financial cards in China. Only a small proportion of cards in circulation are charge cards (i.e. what are known as quasi-credit cards in China) and credit cards. Debit cards in China incorporate the most basic ATM function. These cards can also be used at EFTPOS terminals to make purchases.

As a result of its well-established presence, it is hardly surprising that debit cards form the most dominant sector within financial cards. In addition, the lax qualifying criteria mean that most Chinese are able to obtain a debit card. Debit cards continued to demonstrate robust growth of 35% in terms of the number of cards in circulation in 2003. This strong growth was possible as there are still many in China who have yet to obtain a debit card.

Credit cards, on the other hand, have a small base in China. This is because in the past, the disposable income levels of most Chinese consumers would render them unable to qualify for credit cards. To the majority of Chinese, cash remains king as this is a payment mode that they are highly familiar with. Nevertheless, with the country's rapid development over the review period, such a mindset has shown signs of changing. Coupled with supportive policies from the government, credit cards posted a 75% increase in cards in circulation in 2003.

Greater foreign presence and increased competition in China's financial cards in future
China's accession into the WTO was not without its conditions. One of these included China's financial markets opening up after 2002. Towards the end of 2003, the financial cards industry in China was abuzz with murmurs that the country will finally be allowing foreign players to enter. Citibank Corp and Hong Kong and Shanghai Banking Corp (HSBC) were touted to be the ones most likely to be allowed greater flexibility pertaining to their financial cards operations in China come 2004.

Citigroup's deal for credit cards in China

US banking giant Citigroup has agreed a strategic alliance with a Chinese bank so it can enter China's emerging credit card market.
China is a top priority for Citigroup
Sandford Weill, chairman Citigroup
Citigroup said it had acquired a 5% shareholding in a Chinese commercial bank, Shanghai Pudong Development Bank (SPDB), and a seat on its board.
Citibank became the first foreign bank to open its doors to Chinese customers in March 2002 when it got permission to carry out foreign currency transactions.
The credit card deal with SPDB is a huge step towards Citibank's ultimate goal of carrying out local currency business for Chinese customers.
Top target market
Citigroup gave no financial details of the transaction, but it is reported to have paid 600 million Yuan ($72.5m; ?5.5m), according to the independent China Online news website, which cited company sources.
"China is a top priority for Citigroup," said Sandford Weill, the US bank's executive chairman, welcoming the deal.

Big city stores are increasingly stylish
"We expect to issue our co-branded local currency card in 2003," SPDB chairman Zhang Guangsheng said.
Bank lending to consumers is still in its infancy in China.
For much of the last fifty years the country's banks have operated as cashiers for often insolvent state enterprises, paying little attention to their ability to repay, and building up a mountain of bad debt.
China's market reforms and entry into the World Trade Organisation (WTO) have prompted a government-supported shake up of the banking sector, which is under pressure to allocate credit more effectively.
More reforms needed
Of China's 1.3 billion consumers, only about 20 million have credit cards, and the lack of a national bank clearing system to co-ordinate transactions means most card holders can use their plastic only locally.

New shopping malls are popular hangouts
Foreign banks have therefore identified credit card shopping as a market with plenty of scope for growth, though the eventual scale of such business will depend on regulatory reforms.
Citigroup said its new partner, SPDB, had built a successful franchise in just 10 years, becoming China's ninth largest commercial bank with 270 branches in major cities. It has total assets of $30bn.
SPDB chairman Zhang Guangsheng said he believed the tie-up with Citigroup would enable it to become one China's top banks.
Citigroup said developing the credit card business would be "the focal point" of its alliance with SPDB, which it will provide with technical assistance.
"It is intended that this business will apply to set up an equity joint venture in the future," the US bank said.
The deal gives Citigroup the option to increase its shareholding in its Chinese partner in the future, provided it wins regulatory approval.
Citigroup first opened consumer banking operations in China in 2001, though it had built up a corporate and investment banking business with 900 clients.

Source from "BBC Business News"