The China Thread

ROUNDUP - China opens credit card market to Citibank, HSBC; risks seen

BEIJING (AFX-ASIA) - China has finally opened the door to international banking giants Citigroup Inc unit Citibank and HSBC Holdings PLC to enter the country's fast-growing credit card business.

But analysts and even bank executives are not anticipating any return in the short term because of the high costs of acquiring customers, rising competition and credit risks.

Both foreign banks said their local partners have been given government approval to launch yuan and US dollar credit card operations in China.

HSBC launched today a co-branded credit card with the Bank of Shanghai, in which it holds an eight pct stake. Cardholders will be able to use the card at any overseas outlet accepting the Visa brand and pay their bills through their yuan account on the mainland.

Citibank said it expects to start issuing cards with Shanghai Pudong Development Bank (SHA 600000), in which it holds a 4.62 pct stake, within the next few weeks.

Neither Citibank nor Shanghai Pudong Development would disclose whether the card will be co-branded, but Citibank is providing all the management and technology expertise for the venture.

"According to international practice, we are prepared to see losses in the credit card business with Citibank in the initial two years because of the costs of aquiring new clients," Shangahi Pudong Development spokesman Yang Guoping told AFX-Asia.

But Shanghai Pudong expects to see significant returns in the long term as the credit card business becomes an important plank in its strategy to expand its consumer banking business, which currently accounts for only 10 pct of the bank's total income.

The bank aims to attract high-net worth individuals to sign up for its credit card and use this as a platform to sell them Shanghai Pudong's other personal banking services and products, Yang said.

But Yang Qingli, a senior banking analyst with CITIC Securities, sees plenty of problems ahead which could limit the profitability of credit card ventures.

These include intensifying competition, government control over interest rates and an undeveloped personal credit reference system.

"China still keeps tight control on interest rates, so management fees for credit card users are currently an important source of profit for issuers, with annual charges ranging from 20 to 100 yuan," she said.

Many other local banks, including China Merchants Bank (SHA 600036), are also starting to issue dual currency credit cards, she said.

"Local lenders are not afraid of engaging in price wars to attract customers," she said, adding this could pose a threat even if their services are inferior to those of sophisticated foreign institutions like Citibank.

"It is too early to forecast any profits from the credit card business of foreign banks, although it is certain that the credit card market has huge potential to grow over the long term," she said.

The absence of a comprehensive and reliable national personal credit reference system in China presents a significant risk to both local and foreign credit card issuers who cannot check the creditworthiness of potential customers in a country where the concept of debt repayment is not firmly entrenched.

The absence of a personal credit rating system has already become a serious problem in the auto sector. State media reported last year that about 30 pct of borrowers in this area have failed to repay their bank loans on time.

With this problem in mind, the government last week approved a new central bank law, which takes effect in February, requiring the People's Bank of China to start collecting corporate and personal credit status information for financial institutions as part of move to control risks in the financial sector.

The foreign banks themselves are also aware of the risks.

Both Citibank and HSBC have said they will initially limit their focus to Shanghai which has the most developed local personal credit status information system in the country.

The local government-sponsored system has compiled credit records for 3.25 mln residents and can provide complete personal credit status reports on 850,000 residents, according to a Shanghai government spokeswoman.

HSBC and Bank of Shanghai said their co-branded credit card is mainly designed for Shanghai residents who travel frequently between Shanghai and Hong Kong.

Citibank is more ambitious, saying it plans to distribute credit cards through Shanghai Pudong's 290 branches, although 119 are in Shanghai itself and most of the others are in major cities like Beijing and Guangzhou.

But Wang Li, Citibank's China spokeswoman, told AFX-Asia: "Credit cards will only be issued to clients with a sound credit status."

In spite of the risks, analysts say it's still worthwhile for foreign banks to venture into the yuan credit card business because it allows them to skirt China's ban on allowing them to offer yuan services to Chinese individuals until the end of 2006.

Citibank and HSBC will gain a major head start over their competitors who do not have local partners in attracting high net worth individuals and building up brand recognition ahead of the full opening of the banking market, analysts say.

Foreign banks who want to issue their own yuan credit cards to mainland residents will have to wait until 2007.

"These foreign banks are getting into China's personal yuan business indirectly ahead of China's opening schedule and gaining a competitive advantage," said Li Lei, an analyst with China Securities.

He believes the prospects for long-term profitability for foreign players in China's credit card business are good.

"This is a huge untapped market and these banks are focusing on affluent clients," he said.

"Foreign banks have much better ability to attract the 20 pct of affluent clients who generate 80 pct of the profit," he said.

He said Chinese commercial banks who blindly issued bank cards over the last few years to attract customers have made little money because of poor management, a lack of proper customer targetting and the relatively small proportion of credit cards issued as a percentage of overall bank cards.

Figures from the People's Bank of China show domestic financial institutions had issued 569 mln bank cards by the end of June 2003. But the vast majority of these were debit cards and rarely used.

A survey last year by credit card issuer Mastercard International estimated that only 1.0 mln were true credit cards with a further 24 mln having some kind of credit function.

(1 usd = 8.3 yuan)

xin.zhou@xfn.com

02/01/2004 10:49