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SCMP Reporter

The exposure of the Hong Kong banking system to non-bank mainland entities has continued to decline, but has failed to impress bankers.

 The bankers said the crisis of deteriorating mainland asset quality was far from ended, and warned that further provisions against bad loans may be needed.

 Exposure to non-bank mainland entities by all authorised institutions in the quarter to June 30 fell 9.1 per cent from the previous period to $254.8 billion. In the first quarter it dropped 5.7 per cent.

 Despite the easing exposure, Bank of East Asia chairman David Li Kwok-po said leading US and European banks would continue to hold off on new lending to Hong Kong and the mainland if the problem-loan issue remained unresolved.

 The deadlock would hinder the recovery of Hong Kong and the long-term economic well-being of the mainland, he said.

 Statistics issued yesterday by the Hong Kong Monetary Authority, showed the $254.8 billion exposure represented 3.8 per cent of the SAR banking system's total assets, down from 4.1 per cent in the first quarter.

 This figure includes both on-balance sheet and off-balance sheet exposures to non-bank mainland entities, including international trusts and investment corps established by provincial and city governments.

  The announcement came after Bank of China Group disclosed on Tuesday its exposure to the mainland was $84 billion. About half of the group's $29.35 billion in bad and doubtful debts came from mainland exposure.

 The HKMA said the reduction in exposure was due to a combination of factors, such as repayments, transfer of exposures to head offices or overseas offices by some foreign banks, and reporting errors made by banks in the previous survey.

 Mr Li said he had recently visited Germany and met some of its leading bankers.

 'They indicated they would not grant new loans to Hong Kong and China [until a proper solution is found for the Guangdong Enterprises (GDE) restructuring].'  Mr Li said he had heard similar indications from other leading banks in Europe and the United States.

 'They've lost a lot of money. They'll chop their fingers,' he said.

  Mr Li said he had forwarded this view to Chief Executive Tung Chee-hwa. He had also requested that Mr Tung send Financial Secretary Donald Tsang Yam-kuen and HKMA chief executive Joseph Yam Chi-kwong to Beijing to discuss the issue with mainland officials.

 'I want them to explain to the officials that if the mainland companies continue to do things like this [improper borrowing practices], both Hong Kong and the mainland will be negatively impacted,' Mr Li said.

 'It is now increasing difficult for companies to borrow from Hong Kong or from overseas. If this trend continues, Hong Kong's recovery and the long-term well-being of the mainland economy will be affected.'  The severity and depth of the negative implications for Hong Kong and mainland companies from the GDE fallout had been beyond the expectation of most mainland officials, Mr Li said.

 He said he had misjudged the chances of an improvement in the mainland's asset quality.

 'I'll try to be more conservative in forecasting an improving mainland credit outlook,' Mr Li said.

 By June 30, Hong Kong banks' total exposure to non-bank mainland entities amounted to $78.3 billion, down 3.9 per cent from March 31.



Banks warn of more mainland problems