China's history of credit card usage is still relatively short, as the first card was only launched in 1985 by Bank of China. Competition among Chinese banks in recent years has been intense, as they strove to expand their sources of fees and commission income to offset margin pressure in their lending business.

UnionPay remains the only payment services provider that processes domestic credit card transactions in China. For now, international card companies are only allowed to issue co-branded cards in partnership with UnionPay or a Chinese bank. Visa and Mastercard only offer Chinese consumers the ability to pay outside China when travelling.

“We saw a pickup in overdue loans, primarily in the credit card and personal loan segments in January and February,” said Jin Yanmin, China Construction Bank’s chief risk officer during its 2019 earnings call in March, adding that its credit card business contracted during the first two months of the year.

But Jin said he still expected that the delinquency ratio for the full year would stay at a similar level as last year. Its credit card NPL ratio was at 1.03 per cent.

“Among all retail loans, the weakening in asset quality is most obvious in credit card loans during the first quarter … and that is something we are keenly watching because it accounted for a third of the big state-owned banks’ fees and commission income,” Shirley Yeung, PwC China financial services partner.

The growing risk is also underlined by a research report published by brokerage China Renaissance in April, which said a surge in China’s household leverage in recent years means that the country could be experiencing “its first consumer credit down-cycle triggered by Covid-19”.

“Those households borrowing high-cost consumption loans may be at risk of default, and worse-than-expected unemployment and credit tightening could exacerbate the severity of the downturn,” analysts including Bruce Pang, Melody Lai, Jacky Zuo wrote in a report dated April 7. 

Retail loans saw rapid growth across recent years, as credit card loans saw a 31 per cent compound annual growth rate spanning 2014-18 before a slowdown last year, China Renaissance said.

Although only 12 per cent of China’s 62 trillion yuan of household debt comes from credit card loans, rising household debt means borrowers will struggle.

China’s household debt service ratio, or the annual debt payment as a percentage of household’s disposable income, stood at 10.8 per cent in China last year, higher than the 9.7 per cent in the US. Meanwhile, debt-to-disposable income rose by 45 percentage points over the five years to 2019, to 129 per cent, higher than 97 per cent in the US, according to China Renaissance’s report.

This has come as China’s urban unemployment rate jumped to an all-time high of 6.2 per cent in February this year, according to data from the National Bureau of Statistics.

To be sure, credit cards accounted for less than 10 per cent of the total loan books of big state-owned banks such as Industrial and Commercial Bank of China, Bank of Communications, China Construction Bank.

For example, Ping An Bank said its credit card NPLs rose 29 basis point during the second half of 2019, to 1.66 per cent, and its credit card loans account for as high as 23 per cent of its loan book, according to a report from CMB International Securities dated March 31.

Overall, while more customers might fall behind in their credit card loan repayments, Yeung expects bank-wide NPLs to hover at around 2 per cent this year.