China opens door to foreign credit cards

China has opened the door to international banking giants Citibank and HSBC to enter the country's fast-growing credit card business.

HSBC launched today a co-branded credit card with the Bank of Shanghai, in which it holds a 8% stake while Citibank said it expects to start issuing cards with Shanghai Pudong Development Bank, in which it holds a 4.62%, within the next few weeks.

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.

The absence of a reliable national personal credit reference system in China presents a significant risk to both local and foreign credit card issuers who cannot check the credit-worthiness of potential customers.

To address this problem 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.

There are currently over half a billion cards in circulation in China, the majority of which are debit cards drawing on accounts at Chinese banks.

Due to the dearth of reliable data on credit-worthiness, less than 1% of these are credit cards.

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 move to let the foreign banks tap into the credit card industry comes as part of a package of reforms China is undertaking to meet its World Trade Organisation obligations.

On signing up to the WTO in January 2002, the country agreed gradually to open up the financial services business to foreign competition by 2007.