TAPPING INTO CHINA: A customer at a branch of the Citibank in Shanghai. The bank sees independent issuance of credit cards in China as a big breakthrough (CFP)

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 first, 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 first 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 Changsha-based 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 firm 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 Shanghai-based Orient Securities Co. Ltd., said low profitability is also an intractable problem troubling the emerging industry.

"Credit card issuers usually make profits 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.

Email us at: huyue@bjreview.com