BEIJING, April 17 -- Chinese banks are dropping annual fees for credit cards, offering high credit limits and giving away free gifts in order to grab as large a slice as possible of the country's rapidly growing credit market.

    All of the major banks have jumped into the race, with some working hand-in-hand with foreign banks and finance companies, and others opting to fight it out alone.

    China Merchants Bank currently holds the largest market share, having issued more than 5 million dual-currency credit cards since 2002. The Shenzhen-based lender has aggressively worked with shops and airlines to expand its client base to students, fashionable women and frequent flyers.

    Other banks are racing to catch up, including the Bank of Communications. The BoCom launched its co-branded card with HSBC Holdings in July 2005. The Shanghai-based lender has issued more than 800,000 credit cards to date, and says it expects to meet its target of 1 million cards in circulation by June.

    Several smaller banks have stated their intentions to enter the market.

    The race to win market share isn't surprising given that Chinese banks hold US$1.8 trillion in household savings, and the country boasts the world's fastest growing major economy.

    Credit cards will become the most important consumer credit product after mortgages, with annual profits reaching US$1.6 billion by 2013, accounting for 22 percent of profits from consumer credit, New York-based McKinsey & Company consulting firm said in a recent report.

    Some industry analysts fear that banks are going too far to earn market share, however, and the high credit limits they are offering will come back to haunt them.

    The McKinsey report said overly high credit limits force banks to keep unnecessarily high capital reserves and expose them to large amounts of risk.

    "Grabbing market share is the first step for lenders to build their credit card business," said Qiu Zhicheng, an analyst with Haitong Securities Co. "The risk, though it may not be immediate, will lead to unhealthy growth if it is ignored."

    Most Chinese cardholders use the cards for convenience, not long-term credit, and pay off their full balance every month. But younger consumers have shown they are more likely to spend, and less willing to save than their parents, Qiu said.

    The phenomenon is so popular several new words have entered the Chinese language to refer to it.

    "Moonlight," has become a popular term to describe youngsters that use all of their salary each month and never save any money. The term is a play on the words yue (meaning moon) and guang (meaning both light and leave nothing behind).

    Young consumers that borrow from one card to pay off debt on another are commonly referred to as "card slaves."

    Analysts question, however, if banks are improving their risk management systems quickly enough to deal with the growing credit card market.

    "Asian banks' enthusiasm for consumer lending, credit card lending as a particular issue, may be leading to growth rates that outpace the improvements in risk management capability," Fitch Ratings said in a recent report.

    Banks can't solve that problem alone, they need help from the government.

    A nationwide database tracking personal credit information was put into operation in January under the organization of the People's Bank of China, the country's central bank.

    China Unionpay, a nationwide integrated system for all bank cards transactions, has set up a database tracking those who default on credit card debt or debit card overdrafts. All domestic bank card issuers that use Unionpay's platform can share the information.

    "We want a healthy and profitable credit card business, whose growth is not boosted by applicants who pick up the cards simply to get a free stuffed toy," said Norman Chan, marketing and sales director for Guangdong Development Bank's credit card center, the first mainland bank to report a profit from its credit card division.

    (Source: Shanghai Daily)