Hong Kong banks are building up a potentially dangerous exposure to foreign currency loans after an explosion in US dollar loans in May.
That lending surge triggered moves by the Hong Kong Monetary Authority to rein in over-aggressive lending, forcing banks to step up credit controls to manage the risks.
Bank loans increased by around 3 per cent month-on-month in June, an annualised rate of 40 per cent, after a 1.7 per cent month-on-month increase in May, an annualised rate of 20 per cent. Of the amount, 60 per cent was in US dollars.
The growth over the two-month period is higher than the average of 19 per cent for the first six months.
"It is quite a worrying sign as the growth rate is substantial," a HKMA spokesman said. "The HKMA is contacting all banks to understand why there is such a strong growth in US dollar loans, and whether such a trend will continue."
The HKMA believes one reason might be because of a lack of liquidity in the international market, which led some multinationals to tap for funds in Hong Kong.
"Since Hong Kong is an international market, it is natural for international firms to tap funds here," the spokesman said. "However, the HKMA needs to make sure Hong Kong banks have the credit controls in place to ensure they are not expanding lending too quickly while not paying sufficient attention to credit quality."
In addition, the HKMA is also concerned whether banks have sufficient US dollar liquidity.
"Banks may want to expand their US dollar loan business because they have too much deposits on hand. But they need to be careful in managing their foreign currency liquidity. It would be risky if they cannot attract sufficient US dollar deposits when they step up lending in that currency too quickly," the spokesman said.
HKMA will conduct on-site checks and meetings with banks to ensure sufficient risk management is in place.
The monetary authority has also ordered banks to tighten their lending to moneylenders to ensure it does not affect the HKMA's measures to cool the property market.
Moneylenders are financial firms that only offer loans and are not subject to the regulation of the HKMA.
There are about 50 moneylenders that borrow from banks for financing personal and mortgage loans to consumers.
In March, moneylenders offered about HK$8 billion in mortgage loans, which is less than 1 per cent of the total issued by banks.
However, some moneylenders offered loans up to 95 per cent of the value of the property for mortgage loans as they do not need to adhere to the HKMA's tightened policy on mortgage loans.
The HKMA spokesman said if moneylenders could offer better terms than banks, many borrowers might turn to them for funds. Many might consider taking mortgage loans from them instead of banks. As such, the HKMA has ordered banks to require those moneylenders that borrow from them to comply with HKMA requirements.
"If the property market falls and the borrowers cannot repay their loans, the moneylenders would suffer," the spokesman said.
Correction: A previous version of this article stated that "Bank loans in May increased 40 per cent from April, followed by a 20 per cent growth in June." This was amended to "Bank loans increased by around 3 per cent month-on-month in June, an annualised rate of 40 per cent, after a 1.7 per cent month-on-month increase in May, an annualised rate of 20 per cent."