Concerns grow over Hong Kong lenders' heavy credit exposure to mainland Chinese firms
Debts to mainland firms soar from near zero to US$430b in just a few years amid default fears
In just a few years, Hong Kong banks have ramped up lending to the mainland from near zero to US$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 would be a sensitive indicator of the mainland'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, have underscored concerns that an unprecedented surge in company debt on the mainland is now showing signs of unravelling.
"The quality of these loans extended by Hong Kong banks to Chinese firms has not been tested," said Mirza Baig, head of foreign exchange and interest rate strategy at BNP Paribas. "That is a concern in the backdrop of the rapid rise in exposure."
Foreign bank claims on the mainland hit US$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 showed. The US$430 billion in loans outstanding represented 165 per cent of the city's gross domestic product, BIS figures showed.
Data from the Hong Kong Monetary Authority showed a similar astonishing rise. By the end of last year, Hong Kong banks' net claims on the mainland as a percentage of their loan book was nearing 40 per cent, compared with zero by 2010.
Singapore has also ramped up its mainland Chinese loans, but its exposure is the equivalent of 15 per cent of its GDP.
Local banks in both centres have taken over lending that foreign players once dominated, drawn by low funding rates, a voracious appetite from mainland Chinese borrowers and healthy growth in the world's second-biggest economy.
"Hong Kong banks have pounced on arbitrage opportunities between on- and offshore [yuan] funding rates," said Cathy Holcombe, a strategist at Gavekal Dragonomics.
There is no breakdown of the type of loans behind the US$430 billion figure. But Stephen Long, managing director of financial institutions at Moody's Investor Services, said "a substantial part" was in lower-risk categories such as trade finance. This would include loans to Hong Kong blue-chip companies operating on the mainland or loans supported by guarantees from Chinese banks.
However, trade finance may also hide speculative flows that bet on a rise in the yuan. In this trade, investors and companies falsify trade receipts to convert foreign currency into yuan and avoid capital controls.