Hong Kong's soaring bank exposure to China sparks credit concerns

Mon Mar 24, 2014 5:02pm EDT
 
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By Saikat Chatterjee

HONG KONG (Reuters) - In just a few years, Hong Kong banks have ramped up lending to China from near zero to $430 billion, fuelling concerns about their credit exposure to the mainland at a time when sliding economic growth and defaults are making investors nervous.

Even a modest increase in non-performing loans would have a significant impact on Hong Kong bank profits, suggesting the sector will be a sensitive indicator of China's debt markets in the year ahead.

A landmark domestic bond default earlier this month and headlines of bankruptcies - highlighted last week by Zhejiang Xingrun Real Estate Co - have underscored concerns that an unprecedented surge in company debt in China is now showing signs of unraveling.

"The quality of these loans extended by Hong Kong banks to Chinese companies has not been tested," said Mirza Baig, head of foreign exchange and interest rate strategy at BNP Paribas in Singapore. "That is a concern in the backdrop of the rapid rise in exposure."

Foreign bank claims on China hit $1 trillion last year, up from nearly zero 10 years ago, and the biggest portion was provided by Hong Kong, Bank of International Settlements data shows. The $430 billion in loans outstanding represents 165 percent of Hong Kong's GDP, BIS figures show.

Data from the Hong Kong Monetary Authority (HKMA), the city's de-facto central bank, showed a similar astonishing rise. By the end of 2013, Hong Kong banks' net claims on China as a percentage of their total loan book was nearing 40 percent, compared with zero by 2010.

The rival financial center of Singapore has also ramped up its China loans as well, but its exposure is the equivalent of 15 percent of its GDP, figures from its monetary authority show.

Local banks in both these centers have taken over lending that foreign banks once dominated, drawn by cheap funding rates following the global financial crisis, a voracious appetite from Chinese borrowers and healthy growth in the world's second-biggest economy.   Continued...

 
Hong Kong's central financial district's (L-R) Bank of China Tower, Cheung Kong Centre, HSBC headquarters, Standard Chartered Bank and Legislative Council (front L) are pictured lighted up before Earth Hour March 31, 2012. REUTERS/Tyrone Siu