Rewards, risks as Chinese embrace credit

By Tony Munroe

BEIJING (Reuters) - As China evolves from a nation of savers to one of borrowers and investors, banks are salivating over the prospects, but risks loom in a market where consumer credit is a novelty and competition is intensifying.

By global standards, China's 1.3 billion people have only dabbled in financial services. While households have stashed away some $2 trillion in savings, rates of credit card usage, mortgage loans and car ownership are among the lowest in the world.

That is changing fast as China's surging economy creates an expanding consumer class. JP Morgan (JPM.N: Quote, Profile, Research, Stock Buzz) expects retail lending in China, including mortgages, credit cards and car loans, to grow from US$247 billion currently to US$1 trillion by 2010.

Consumer loans are equivalent to just 14 percent of gross domestic product in China, compared with 59 percent in Hong Kong and 65 percent in South Korea, while the market for investment products is also underdeveloped.

"The consumer business is in an early stage," Richard Stanley, China chief executive at top global financial firm Citigroup (C.N: Quote, Profile, Research, Stock Buzz) told the Reuters China Century Summit this week. "In the long term it will be our biggest business in China."

Bank of China (3988.HK: Quote, Profile, Research, Stock Buzz), which is the country's number-two lender but has only issued about 1 million credit cards -- compared with 95 million debit cards -- expects retail loans to increase by 16 percent to 18 percent a year -- much faster than growth in the economy and overall lending.

At rival China Construction Bank (0939.HK: Quote, Profile, Research, Stock Buzz), half of the fee income it generated in the first half this year came from retail products such as credit cards and insurance, compared with 46 percent a year earlier.

Both banks are teaming up with foreign partners to beef up their credit card offerings, while they are also looking to leverage the opportunities presented by their vast branch networks to sell more insurance products.  Continued...