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.