Low revolving credit card use, bad debt and low interchange rates all present challenges to issuers hoping to establish themselves in the rapidly growing Chinese card market, according to a report from the Boston market research firm Celent.

Celent, a unit of the Oliver Wyman subsidiary of Marsh & McLennan Cos. in New York, estimated in the report released last week that Chinese banks have issued 38 million cards since 2003 and that the potential market could exceed 200 million consumers next year.

China's credit card market has "tremendous potential for growth," the report said. "These people are potential credit card customers."

However, interchange rates applied to merchant acquirers and paid to card issuers in China typically run between 0.7% and 1% of sales, lower than the 1.5% to 2% seen in other Asian countries, Celent said.

Moreover, the "revolving credit usage rate is relatively low" in China "so [that] net interest income accounts for only about one-third of the total credit card income."

Chargeoffs are also an increasing problem.

"China Merchants Bank, one of the most successful banks in the credit card business, had a nonperforming rate of credit card receivables of 2.8% in December 2008," the report said, though "in December 2007 it was only 1.9%."

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