Credit Craze

Citibank gets green light to issue credit cards in China By Hu Yue

Credit Craze

Citibank gets green light to issue credit cards in China By Hu Yue

On hearing the news that U.S. financial services giant Citi announced it had obtained approval to issue credit cards in China, Chen Shuye, a 30-year-old tour guide in Beijing, got excited.

“I’d like to try credit cards from Citi,”said Chen, who has been using a credit card issued by Shanghai Pudong Development Bank (SPDB) co-branded with Citi. “It offers discounts for spending at many overseas hotels, restaurants and shopping malls, which gives me great convenience when I take tours around the world,” he said.

“Perhaps the services of independent Citi credit cards will be even better,” said Chen.

Citi’s co-branded credit card business with the SPDB started in 2003 with the SPDB providing technical and personnel support.The newly approved credit card business in China is expected to be launched sometime this year, making the American banking giant the fi rst non-Asian bank to offer its own plastic cards of commerce in China.

Stephen Bird, CEO of Citi Asia Pacific,said that this approval represents a signi fi cant milestone in the continued expansion of Citi’s business in China, a priority market for Citi.

“Our business in China continues to perform strongly across both institutional and consumer lines, and our ability to introduce a credit and commercial card proposition adds to our healthy growth momentum in this key market,” he said.

“We have a dynamic consumer banking business and a broad-based institutional business in China. The ability to offer retail and commercial cards provides Citi with a strong competitive edge further meeting the needs of our expanding customer base,” said Andrew Au, CEO of Citi China.

Exploring China

Citibank is one of many foreign banks scrambling to cash in on the thriving Chinese economy and booming banking market.

A total of 127 foreign-funded banks held combined banking assets of 1.7 trillion yuan($269.8 billion) at the end of 2010, up 29 percent from a year earlier, said a report from the accounting fi rm PwC. That accounted for 1.83 percent of the country’s overall banking assets, compared with 1.71 percent in 2009.

Under Chinese rules, foreign banks must incorporate their operations locally to tap the mass retail market and offer products such as credit cards. Around 40 foreign banks are now locally incorporated in China, according to data from the China Banking Regulatory Commission.

In April 2007, Citi was among the first international banks to locally incorporate in China.

In recent years, Citi’s foray into the Chinese market has picked up pace. In September 2011, Citibank set up its fourth small lending company in the country to provide credit to individual borrowers, the self-employed and micro-enterprises. It was t h e f i r s t international bank to introduce the lending company model to China in 2008.

Credit card buoyancy

As foreign banks seek to solidify their China foothold, the credit card sector presents new growth opportunities.

“Three major factors are expanding the use of credit cards in China—fast wage growth of the young population, technological developments and the emerging trend of e-commerce,” said Guo Tianyong, Director of the Research Center of China’s Banking Industry at the Central University of Finance and Economics.

In 1985, the Bank of China’s Zhuhai branch in Guangdong Province issued the country’s fi rst credit card. Now, the market is getting into full swing as credit cards increasingly gains popularity.

By the end of September 2011, Chinese banks had issued 268 million credit cards,more than five times the level at the end of 2006, according to data from the People’s Bank of China, the central bank.

The international payment network MasterCard Worldwide said in a report that China may overtake the United States as the world’s largest credit card market by 2020,with 800 million to 900 million cards in circulation.At fi rst, foreign banks were only allowed to issue credit cards in collaboration with local companies.Similar to Citi’s cooperation with the SPDB, the HSBC in 2009 set up a credit card joint venture with Bank of Communications Ltd.

Regulators loosened the restrictions in 2008. The Bank of East Asia, based in Hong Kong, became the fi rst and only bank outside the mainland permitted to issue credit cards independently in the Chinese market.

“Citi’s entry means China is continuously opening up its banking industry to the outside world,” said a recent report by the Changshabased Founder Securities Co. Ltd.

Market-savvy foreign banks will present even greater competition to their Chinese counterparts, leveraging their cross-border experiences and management expertise.

Citi’s prospect

As Citi gears up to broaden its presence in China’s credit card market, its success is far from guaranteed—doubts have been proliferating that Citi’s still-small network in China could support its credit card ambitions.

Citi now has 13 corporate bank branches and 45 consumer bank outlets in 13 Chinese cities.In comparison, the Industrial and Commercial Bank, China’s largest lender, boasted more than 16,000 outlets by the end of 2010, allowing it to control more than 30 percent of the credit card market share in the country.

“More foreign banks are expected to follow Citi, increasing pressures on their local rivals,” said Guo. “But they still have a long way to go to fare better in China due to network limitations.”

“Chinese banks have grabbed 95 percent of the market share, leaving less room for foreign competitors,” he added.

Meanwhile, “card penetration remains relatively low in China,” said Guo. Data from the consulting fi rm McKinsey & Co. showed only14 percent of eligible customers have a credit card on China’s mainland, compared to 81 percent in Hong Kong and 70 percent in Taiwan.

Another cause for concern is that many cardholders are falling behind their monthly obligations. China’s credit card debt that was overdue for at least six months was 10.65 billion yuan ($1.68 billion) by the end of September 2011, up 7.3 percent from three months ago, said the central bank.

“I like and also hate credit cards,” said Lin Wenying, a 26-year-old interior designer in Fuzhou, capital of southeast China’s Fujian Province. “I pay at least 5,000 yuan ($794)for meals, clothes and cosmetics every month with credit. It feels good to spend money that you don’t have. But when bills come, I’m always surprised at how much I’ve spent.”

“Credit card debt awareness is weak among Chinese consumers,” said Zhang Xin, a senior banking analyst with the Beijing-based China Galaxy Securities Co. Ltd. “Meanwhile, many unscrupulous issuers recklessly put their cards into the wallets of low-income consumers, such as university students.”

Jin Lin, an analyst with the Shanghaibased Orient Securities Co. Ltd., said low profitability is also an intractable problem troubling the emerging industry.

“Credit card issuers usually make pro fi ts from the annual fees paid by cardholders,charges on local merchants and interests on overdrafts,” he said.

“But in China, issuers mostly charge low fees on consumers and merchants, or provide promotional offers to grab market shares,” he said. “Moreover, most Chinese card users do not go over the overdraft limit, making interest income less lucrative.”

“Instead of competing for customers blindly, banks should focus more on risk control and improving services for prime customers,” said Jin.

ENG ZHONGDE

a regulatory nod of approval to establish a joint venture securities fi rm in China together with the Orient Securities Co. Ltd. The new entity will engage in investment banking business, including securities underwriting and sponsoring.