In just a few short years, China has
developed a modern cards payment system and card use is on the
rise. Foreign and domestic issuers alike are attracted by the
recent phenomenal rates of growth in card numbers, and, of course,
the potential of a market with 1.3 billion people. Sarah

China represents a market of vast untapped consumer potential,
where household wealth is growing at a mesmerising rate. The
country’s new breed of consumers are a prime market for payment
cards of all types, and this has led to both foreign and domestic
issuers scrambling to put their card operations in place.


Any discussion of the cards market in China must be put in the
context of alternative methods of payment. The fact remains that
cash is still by far the most popular method of payment for goods
and services, for both cultural and practical reasons. Many
employees’ salaries are still distributed as cash in envelopes,
rather than by cheque or direct deposit. Moreover, it is not
unusual for major purchases, such as cars or even houses, to be
paid for in cash.

Debit cards

The Bank of China issued the country’s first bankcard in 1985.
Since then, the number of cards has grown dramatically, and by the
end of 2006, there were an estimated 1.13 billion cards (both debit
and credit) in issuance (see Figure 1). The vast majority
of these (around 1.08 billion) were debit/banking cards. It has
been estimated, however, that only about a fifth of Chinese
bankcards are actually used on an active basis.

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Figure 1: Debitand credit cards in circulation

Card acceptance has increased in recent years and the
transaction channels have been extended from traditional platforms
such as POS machines and ATMs (see Figure 2) to new
payment channels such as online banking and telephone banking.
Coverage has also been enlarged from consumption areas such as
restaurants, hotels and retail shops to public services such as
hospitals and schools. Despite this, merchant acceptance remains a
barrier to growth.


China by numbers

Use of cards differs significantly across China. For example,
the People’s Bank of China (PBoC), the country’s central bank,
estimated that by the end of 2005 consumption-related bankcard
transactions as a proportion of the total retail sales of consumer
goods reached almost 10 percent, up from 2.1 percent in 2000
(see Figure 3). However they also highlighted the fact
that in some of the most economically developed cities (eg,
Beijing, Shanghai, Guangzhou and Shenzen), the proportion was more
than 30 percent, which is near the level of many developed

Figure 2: Credit card statistics

Credit cards

Of the 1.13 billion bankcards that were in issue in China at the
end of 2006, only about 4 percent of them (or 50 million cards)
were actually credit cards. This implies a credit card penetration
rate of around 0.038 cards per capita. These figures include both
dual currency cards (around 30 million) and approximately 19
million quasi-cards, which offer both debit and credit card

A report by CCID Consulting estimated that two-thirds of China’s
credit cards are inactive. This would indicate that only around 17
million cards are in active use. The growth in the number of credit
cards in circulation has been so rapid that 80 percent of the 60
million credit cards that are expected to be in circulation by the
end of 2007 will have been issued after 2005.


Figure 3: Consumption-related bankcard transactions


Foreign players

Unsurprisingly, given the huge potential size of the Chinese
cards market, many foreign issuers have shown an interest in
entering the fray. To date, they have done so through joint
ventures or other partnerships. This is because stringent
regulations have barred foreign banks from issuing locally
denominated credit cards. In addition, foreign players can benefit
from their local partners’ knowledge of Chinese cultural issues as
well as an already established distribution network.

In May 2007, China agreed to allow foreign banks to issue
yuan-denominated debit and credit cards following the China-US
Strategic Economic Dialogue, a bilateral macro-economic forum. The
following month, the China Banking Regulatory Commission began
reviewing applications from the locally incorporated units of four
foreign card issuers to issue yuan-denominated debit cards.
Citibank, HSBC, Standard Chartered and Hong Kong’s Bank of East
Asia were the first foreign issuers to receive regulatory approval
to locally incorporate their mainland China operations earlier this
year, which is a prerequisite for offering local currency services
to Chinese retail customers.

It is worth noting that some of these foreign banks (HSBC and
Citibank) already issue co-branded credit cards with Chinese banks
so they are, understandably, treading carefully in light of the new
rules which will, in theory, allow them to issue cards without
local partners.

Standard Chartered Bank and Bank of East Asia, by contrast, are
very active in planning yuan bankcard business as neither of them
has ever co-operated with local commercial banks in issuing credit

The results of a research report were published in July 2007 by
the Economist Intelligence Unit and global payment processor First
Data. The study surveyed 152 senior bank executives who either had
businesses in China or planned to enter China in the next three
years. Some 85 percent of respondents said they were confident
about China’s credit card market, although 43 percent felt that it
was difficult to make profits from credit cards within three years.
Some 80 percent of the respondents felt that the highest barrier to
cards adoption is local retailers who prefer cash payments to


Profitability levels in China are lower than in many other Asian
markets. This is partly because Chinese credit card customers
generally prefer to pay off their credit card bills in full at the
end of each month and therefore do not roll over enough balance to
generate profitable interest charges. In addition, the maximum
interest rate for card borrowing is set by the PBoC at 18.25
percent, making profitability a challenge for foreign banks used to
charging much higher interest rates elsewhere in Asia.

Moreover, the maximum interchange rates for all yuan-denominated
transactions are also set by the PBoC. Observers have pointed out
that these rates often do not reflect true costs, especially as
debit and credit rates have been set at the same level, despite the
fact that costs associated with each type of transaction clearly
differ (see Figure 4).

There has been a rapid increase in credit card profits, although
retail lending remains small as a proportion of total lending. Bank
of China is typical: its credit card loans increased 49.1 percent
in 2006 but retail loans as a percentage of total loans at the bank
were still only 22.3 percent.

What is not in doubt is that credit cards are making up an
increasingly large proportion of bank profits. The China Bank
Regulatory Commission has noted that banks in Shanghai alone
generated CNY466.26 million ($60.97 million) from the bankcard
business in the first quarter of 2007, representing a year-on-year
increase of 31.8 percent. Income from credit cards reportedly
increased 57 percent year-on-year to CNY43.29 million over the same

According to consultancy McKinsey, credit card profits in China
could hit $1.6 billion by 2013, becoming the second largest retail
banking service behind mortgages.


Figure 4: Intercharge rates

China UnionPay

China UnionPay (CUP) is the country’s largest credit card
services company and the only bankcard association and payment
network. It has big expansion plans, both domestically and
overseas. The company has indicated that it intends to enlist 60
percent more merchants, roll out 1.4 million terminals and launch
mobile phone payment services by 2008.

CUP has predicted an increase in the number of POS machines to
1.2 million and up to 120,000 ATMs connected to its network on the
mainland. (By contrast, MasterCard International has an estimated
100,000 merchants in China that accept MasterCard bankcards, with
about 100,000 POS machines and roughly 20,000 ATMs connected to its
network there.)

In the first half of 2007, CUP issued 353 million UnionPay debit
cards, a year-on-year increase of 113.7 percent. The number of
credit cards issued showed remarkable growth – a near 20-fold
increase to 10.21 million cards, surpassing the 10 million-card
target set for the entire year of 2007.

Visa and Mastercard

Visa and MasterCard cards can be issued in China only in
non-yuan currencies. Banks can issue a dual-currency card,
including both a yuan-denominated account and a foreign
currency-denominated account, in conjunction with CUP, so that the
card displays both a CUP and either a Visa or MasterCard badge.
Both Visa International and MasterCard Worldwide are set to
increase their marketing budgets in China, in an effort to persuade
Chinese banks to issue their cards instead of those of CUP, their
major local rival.

In 2006, Visa was reported to have spent CNY200 million in
advertising in China while MasterCard spent CNY50 million. These
figures are expected to more than triple in 2007.

Risk management

In 2006, China set up the world’s largest database, which stores
the credit records of more than 11 million companies and 533
million individuals to help commercial banks and most rural
co-operatives to manage risks and avoid potential fraud.

In 2007, the Bank of Communications announced that it is to
invest at least CNY100 million to set up an internal rating system
to assess the credit worthiness of individual borrowers to cut bad
loans as consumer lending accelerates. The bank plans to launch the
system before 2010.

Each of the bank’s 40 million retail customers and cardholders
will be systematically graded over the course of the next three

Role of government

Part of the credit for the rapid development of the cards
industry in China must surely go to the government. The PBoC has
consistently tried to formulate guidelines and measures aimed at
accelerating the development of the country’s bankcard industry. In
2005, for example, it joined with eight other government agencies
to jointly issue a circular that aims to strengthen the
competitiveness of the local bankcard industry and minimise risk,
largely by stepping up pertinent legislation, enhancing government
support and upgrading technology.

The PBoC’s aim is that by the end of 2008, 60 percent of those
merchants that have over CNY1 million ($125,000) in annual sales
should be accepting cards at the POS. The PBoC has also indicated
that it aims for one-quarter of merchants with sales below that
figure to accept cards by the same date. It also intends to bring
the share of bankcard payments in total retail sales in medium and
large cities to 30 percent by 2008. This target was set in 2004,
when the figure was only 5 percent.


Major players

Bank of China

By the end of 2006, Bank of China had issued 7.21 million
quasi-credit cards in China – it is the largest quasi-credit card
issuer in China in terms of issued card volume and has a market
share of over 37 percent. By the end of 2006, the bank had issued
98.6 million debit cards in mainland China. Domestic credit card
loans amounted to CNY2.87 billion by end-2006 but this was
equivalent to only 0.65 percent of total loans.

In February 2007, Bank of China announced that it was
collaborating with the Royal Bank of Scotland to set up an
independent credit card business unit. This unit will integrate
Bank of China’s existing credit card operations and will be
operated jointly but headed by a Bank of China representative.
Royal Bank of Scotland owns a 4.37 percent stake in Bank of

China Merchants Bank

China Merchants Bank’s number of credit cards in issue doubled
to 10.3 million in 2006. Seventy percent are estimated to be
active, although reports from other sources indicated that only 30
percent of its credit cards are actually active. In its recent
results, the bank announced that its card transaction volume rose
101.8 percent year-on-year to CNY66.4 million to the end of 2006.
The bank is the country’s biggest private lender and has forecast
that the number of credit cards it has in issue will reach 15
million by the end of 2007, a rise of 50 percent from 2006.

China Merchants Bank’s four-year-old card business achieved
profits two years earlier than anticipated and contributed
significantly to profits in 2006. In January 2007, China Merchants
Bank said that it is to focus on its credit card business in order
to offset its lack of outlets and compete with state-owned

Looking forward, China Merchants Bank has indicated that it
expects to double the number of credit cards issued to 20 million
by August 2008, when the Beijing Olympics will be held. Unlike many
of its main rivals, the bank says it is not planning to partner
with a foreign institution and prefers to hire foreign executives


The Industrial and Commercial Bank of China (ICBC) describes
itself as China’s largest lender. Over 2007, it has consistently
been either the second- or third-largest bank in the world by
market capitalisation. By the end of 2006, the bank had issued 15
million credit cards. ICBC’s main retail card product is the Peony
Card. Transaction levels through the Peony Credit Card reached
CNY105.32 billion, while the Peony Money Link Card generated
CNY246.7 billion. There were 170 million Peony debit cards in
circulation as of end-2006.

ICBC is bullish about the future of credit card spending,
forecasting that Chinese spending from credit cards will rise to
between CNY140 billion and CNY150 billion in 2007, up from some
CNY100 billion in 2006.

Bank of Communications

Bank of Communications (BoCom) established its Pacific Credit
Card Centre in October 2004, in a strategic co-operation agreement
with HSBC. HSBC is a 19.9 percent shareholder in BoCom. The total
number of Pacific Credit Cards was 1.94 million and total spending
on these cards reached CNY11.1 billion by the end of 2006. BoCom
has outlined the major business areas in which it co-operates with
HSBC, including risk management, internal control, corporate
business, international business and personal financial service

China Construction Bank

The main card brand in China Construction Bank’s stable is Long
Card. Its number of pure credit cards issued amounts to 6.34
million – 3.22 million of these credit cards were issued in 2006
alone. The number of Long Cards and quasi-credit cards combined was
10.06 million. The number of credit cards issued and spending
amount both recorded a year-on-year growth over 100 percent. The
total spending amount of bankcards reached CNY243.7 billion, up
68.86 percent over 2005.

By the end of 2006, the bank had issued 186 million debit cards
in total, which represented an increase of 20.47 million over 2005.
Spending via debit cards in 2006 reached CNY212.50 billion, an
increase of 69.2 percent over 2005. Fee and commission income from
debit cards climbed to CNY2.88 billion, representing a 17.6 percent
rise compared to 2005.

In May 2007, China Construction Bank announced that it will
partner with Bank of America to set up its credit card business and
eventually launch a joint venture. Bank of America acquired a 8.52
percent stake in China Construction Bank in 2005, for a cost of $3


Figure 5: Share of total number of credit cards in issuance, 2006