Foreign banks slash exposure to Hong Kong

PUBLISHED : Monday, 31 August, 1998, 12:00am
UPDATED : Monday, 31 August, 1998, 12:00am

Hong Kong suffered an unprecedented drop in international bank lending in the first quarter of the year, as foreign institutions scaled back their exposure to the SAR.

The economic and financial turmoil in the region triggered a significant pull-back by Japanese banks in particular, according to figures released today by the Swiss-based Bank for International Settlements (BIS).

This, the bank said, contributed to a US$62.1 billion decline in lending to $400.9 billion.

The figures underline the scale of the credit crunch under which Hong Kong companies have been suffering from for the most part of the year.

The sharp drop in international banks' exposure to Hong Kong dwarfs the $9.7 billion contraction witnessed in the final quarter of last year.

The decline is almost double that experienced throughout the remainder of Asia - excluding Japan and Singapore.

The bank said the overall reduction in assets by Japanese banks throughout the world during the first quarter amounted to $244 billion.

However, it said the trimming of balance sheets both in domestic and foreign portfolios was particularly acute in Hong Kong.

'Although [Japanese banks] remained the largest international lending group among reporting banks at the end of March 1998, the proportion of Japanese bank loans in total claims outstanding has slipped from a peak of one-third at the beginning of the decade to less than 20 per cent,' the bank said.

'The market share of Japanese banks has now fallen back to the level of the early 1980s.' Singapore also suffered a sharp contraction in lending, with exposure dropping $34.7 billion to $257.9 billion.

In Japan, overall lending exposure collapsed by $114.7 billion to $787 billion.

In the remainder of the region, the significant pull-back in lending from banks around the world, resulted in a $33.7 billion reduction in exposure, and left the mainland as the largest bank debtor in Asia, with external bank debt of $90 billion.

The BIS noted the mainland's debt should be put in the context of its $70 billion of deposits held by Chinese resident entities.

However, it said such a comparison was not an appropriate measure to assess the country's financial vulnerability.

'To the extent that deposits held by residents abroad (and recorded as reporting banks' liabilities to the country concerned) include a large volume of official reserves, these can act as a buffer against sharp swings in external financing,' it said.

'However, this role can be compromised if such external deposits also include flight capital, over which the authorities have little control.' After Hong Kong and Singapore, the BIS said the most dramatic fall in outstanding bank exposure to Asia was seen in South Korea, where lending fell by $16.3 billion; followed by Thailand, which amounted to a $8.5 billion drop; and Indonesia, which saw lending decline by $5 billion.

'The banks' retreat from Korea was mitigated by the exchange of some $22 billion of short-term claims on Korean banks into longer-term loans guaranteed by the Korean Government,' the BIS said.

'In all three countries, a sharp contraction in trade credit and the unwinding of collateralised short-term loans granted earlier were possibly the most important influences.

'The decline would have been larger had it not been for the accumulation of arrears, including by institutions taken over by the authorities pending restructuring.'