HUAXIA Bank's Pretty Lady credit card, co-issued with Deutsche Bank, entices women with triple points for cosmetics and fitness-club memberships. The Ms Magic card from China CITIC Bank dotted with Swarovski crystals offers free beauty treatments and health insurance.

They're part of a high-end competition being waged by banks for a place in consumers' wallets in the world's fastest-growing market for credit cards, even as delinquencies have tripled in the past four years and profit remains elusive.

"Credit cards are the ultimate growth area and also the battlefield for banks in China," said Rainy Yuan, an analyst in Shanghai for Taipei-based Masterlink Securities Corp. "Some may never earn a profit out of it, but they have to join the fight, as that's the most efficient way of grabbing deposits and cross-selling other financial services."

The competition is drawing global firms including New York-based Citigroup - the first US bank allowed, as of last year, to issue its own solo-logo cards in China - and HSBC Holdings as they seek to grab market share from entrenched competitors such as the Industrial and Commercial Bank of China, the fourth-largest issuer in the world.

Card issuance in China had more than tripled to 331 million over the past five years by the end of December, according to the central bank, as companies sought to tap 43.6 trillion yuan (US$7 trillion) in household savings, more than the combined gross domestic product of Germany and Brazil. Last year, 46 million credit cards were issued in China.

Outnumbering credit cards

"That number can go much bigger, much higher," Ling Hai, president of the greater China region for MasterCard, said. "There's a lot of opportunities to go with the growth in economy, with the income level rising, with wealth accumulating."

In the United States, credit cards rose 3.4 percent to 536.6 million and debit cards increased 8.7 percent to 560 million. Debit cards outnumber credit cards 10-to-1 in China, according to the central bank.

Encouraging debt has backfired elsewhere in Asia. South Korea's biggest credit-card lender, LG Card, required a 4 trillion won (US$3.5 billion) bailout from creditors after a consumer-borrowing spree encouraged by tax breaks and lax credit screening soured in 2002, pushing up defaults.

In China, banks have failed to generate enough interest income from debt rollover and annual fees to cover the costs of issuance after expanding marketing efforts, according to a survey of executives at 41 overseas lenders published by PricewaterhouseCoopers in July. With annual interest fixed by the government at 18 percent, China's banks can't compete by lowering rates, and instead have to differentiate themselves by offering discounts and gifts. Coach wallets, Hugo Boss quilts and free Starbucks coffee upgrades are all available.

Fees paid by retailers to banks whenever a customer uses a credit card range from nothing for schools and public hospitals to 1.25 percent of the purchase price for entertainment and catering. In the US, retailers are charged about 2 percent.

About 3 percent to 8 percent of cardholders in China roll over their debts, generating interest charges, compared with about 40 percent in the US, according to Richard Huang, a Beijing-based partner at Boston Consulting Group. Meanwhile, it costs 200 yuan to 300 yuan to issue one credit card in the country, Huang estimated.

Only a few of more than 30 major credit-card issuers, including China Merchants Bank and Shanghai-based Bank of Communications, have reported that their credit-card businesses are profitable. ICBC, with 77 million cards as of December 31, doesn't disclose figures.

Highest number

Credit-card issuers are targeting young, affluent users who desire a better lifestyle, are more inclined to use bank loans to fund purchases of cars and need other financial products such as mortgages. Consumers under the age of 35 with assets of more than 500,000 yuan hold the highest number of cards among all Chinese groups, with 2.6 on average. That's lower than about four to five in Hong Kong and six to seven in Singapore, according to a Boston Consulting Group report.

Chen Junjun, a marketing manager at Guangzhou-based China Guangfa Bank, spends 10 hours a day, seven days a week, trying to lure customers to his roofless booth outside a subway station in Shanghai's Pudong New Area. Among the gifts he offers: a wireless mouse, storage boxes and coffee mugs.

"No annual fees, buy-one-get-one free for Starbucks coffee, and you get a free Coach wallet, too," Chen said to a female passerby. "If you have a job, you are qualified. If you have a credit card, you are qualified."

In a tie-up with Apple announced in January, China Merchants Bank is allowing cardholders to buy iPhones and laptops costing up to 30,000 yuan with zero-interest over two years.

China Construction Bank, the nation's second-largest lender, offers those who use its card to buy coffee at Starbucks a free upgrade to a larger size. In January, the Beijing-based bank signed a three-year sponsorship with Manchester United, winning solo rights to issue team-branded cards in China. The club, estimates it has 108 million fans in China.

CITIC Bank's Ms Magic card has attracted more than three million users since August 2005, according to the Beijing-based company. Holders are being offered a 10 percent discount on hotel bookings.

Neither Huaxia Bank nor Deutsche Bank would provide figures for the number of Pretty Lady cards issued. The German lender provides "business assistance and cooperation in various areas including developing Huaxia Bank's credit-card business, which now has more than 2 million cards on issue," said Michael West, a Hong Kong-based spokesman for Deutsche Bank, which owns about 20 percent of the Chinese firm.

In his last major speech as Communist Party chief in November, Hu Jintao vowed to double China's per capita income by 2020 from 2010. That may pave the way for the rest of China's banks to overtake their US counterparts by 2020 as the biggest issuers of credit cards.

Foreign banks remain far behind their Chinese counterparts. The only two permitted to issue solo-logo credit cards are Citigroup and Hong Kong-based Bank of East Asia. HSBC, based in London, is offering technical expertise to local partner Bank of Communications and issues co-branded cards.

Overseas banks have 387 branches in China compared with about 66,600 operated by the five largest state-owned lenders and held just 1.6 percent of the nation's 83 trillion yuan of deposits, according to the latest figures available from the China Banking Regulatory Commission.

"Foreign banks lack the scale to reach out to retail customers," said Stanley Li, a Hong Kong-based analyst at Mirae Asset Securities HK Ltd. "It's better for them to run the credit-card business with China's major local banks, as they can rely on the extensive branch network and merchant relationship of local banks."

Citigroup waived the first-year's annual fee of 300 yuan for Rewards cardholders applying before March or spending more than 20,000 yuan by the end of December.

Affluent customers

The bank, targeting affluent customers in China, requires applicants to have a business card and a minimum monthly income of 3,500 yuan for a local-currency card and 10,000 yuan for a dollar-denominated one. Approval, which normally takes two to four weeks, can be sped up if the applicant submits a copy of an income statement and residence record.

Normally it would take five years for the credit-card business to break even, according to Simon Chow, head of consumer banking at Citigroup's China unit. The bank sought to turn a profit earlier than that, he said.

Bank of East Asia, the first overseas lender to issue its own credit card in China in 2008, said at the time it planned to break even in four to five years. The business has been losing tens of millions of yuan annually and is struggling to attract users, according to an insider.

Banks may adopt more aggressive strategies, including lowering underwriting and card-issuance standards, to encourage spending and promote card usage for overdrafts and installment payments to increase fees, according to ratings firm Moody's Investors Service.