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Hong Kong banks exposure to mainland clients a concern, say analyst

Publication Date : 13-08-2014


The growth in Hong Kong banks' exposure to mainland clients - which analysts say is at a historic high - is sounding alarm bells amid a slowing Chinese economy.

At the end of last year, one-fifth of retail banks' total assets - or HK$2.279 trillion (US$294.35 billion) - are in the hands of non-bank mainland customers in the form of loans or other exposures, according to data from the city's de facto central bank, the Hong Kong Monetary Authority (HKMA).

This is up from 16 per cent at end-2012 and 9.8 per cent at end-2009.

Such a proportion, says Sonny Hsu, a vice-president at ratings agency Moody's, is unprecedented in Hong Kong, and rare in the world in terms of an economy's banking exposure to a single overseas market.

It led the International Monetary Fund (IMF) to issue a warning twice in recent months.

Last month, it released the results of a risk assessment test warning that a sharp slowdown in the Chinese economy "would have severe consequences" for Hong Kong.

"The quality of Hong Kong banks' assets would deteriorate as lower growth adversely affects borrowers' - both Hong Kong and mainland - capacity to repay.

"This pressure would be further aggravated by uncertainty about the recovery of collateral in mainland China."

The Chinese economy has flagged in recent times, though second-quarter growth this year increased slightly to 7.5 per cent from 7.4 per cent in the first quarter.

Economists worry about problems such as wasteful spending and the build-up of bad debt.

The risks for the city come from various directions, say analysts. A KPMG report said it is important to identify early signs of stress, especially in sectors such as property and steel.

Others worry in particular about Hong Kong's smaller banks that may not have the expertise to analyse the credit risks in the mainland.

There are reasons for the steady hike in recent years. Key is the deepening financial integration with the mainland.

Hong Kong is a relatively mature banking market and loan demand is not strong locally, notes Hsu.

This dovetails with hunger from mainland companies for loans. For one thing, interest rates in Hong Kong are generally 1.5 to 2 percentage points lower. Lending curbs on the mainland also drive firms to Hong Kong.

With more mainland companies doing business overseas, there is also a greater need for foreign financing.

In a statement to The Straits Times, the HKMA declined to comment on the IMF reports but says the results of its supervisory work "suggest that the risks of mainland-related loans are properly managed".

It notes that in the past few years, it has stepped up supervisory efforts in credit risk and liquidity risk management.

Regular and thematic on-site checks on banks' credit underwriting processes "have not identified major weaknesses".

From the fourth quarter of last year, the central authority has also subjected banks with high loan growth to a new rule that requires them to maintain a specific level of loan growth against a stable funding requirement level.

Indeed, the IMF warnings come also with the observation that Hong Kong's financial system "is well regulated and supervised and the banking system is resilient to shocks".

The situation is also not yet near the tipping point, says Liao Qun of Citic Bank International, who told the South China Morning Post that mainland growth of under 6 per cent would likely lead to major defaults to which the Hong Kong banking sector would be exposed.

Meanwhile, more can also be done to boost the bulwarks, suggest those interviewed.

One possibility, says banking expert Wilson Chan, a senior consultant at the Hong Kong Institute of Bankers, is to establish a credit database that will allow local banks to check on potential mainland customers that do not have a track record in Hong Kong.

This, after all, is amid what appears to be an inexorable trend for Hong Kong banks.

In an online article on Monday, HKMA chief Norman Chan, while urging banks to manage the risks of mainland exposure, adds: "I hope banks in Hong Kong could exploit the tremendous business opportunities and... consolidate our position as a major banking and financing hub for two-way capital flows between the mainland and the rest of the world."

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