A sharp contraction in lending by Japanese banks through Hong Kong's banking system seems to have begun to subside, according to statistics from the Bank for International Settlements (BIS). The two-year decline in Japanese loans has been a key factor behind plummeting lending volumes, which has threatened to undermine Hong Kong's status as a leading offshore banking centre. Japanese banks have usually transferred funds to their branches in Hong Kong only to repatriate them shortly after in the form of corporate loans, gaining important tax advantages in the process. However, since the 'Big Bang' reforms of Japan's financial system in 1997, liabilities have been repaid while fresh lending has dwindled. Loan demand has also slowed in the wake of the Japanese recession. The trend has meant both Hong Kong and Singapore have seen a sharp impact on their overall lending volumes, although that may now be about to change, the BIS said in its latest quarterly International Banking and Financial Markets Development report. 'Fourth quarter data suggest that the reversal of the round-tripping of funds from Japan through Asian offshore centres may have slowed,' it said. Bank claims in Hong Kong fell only slightly, by US$700 million to US$255 billion, in the last quarter of 1999, while in Singapore they rose US$3.3 billion to US$220 billion. Bankers suggest the reversal in round-tripping may be coming to an end as Japanese banks become more financially stable amid a slow economic recovery at home. As a consequence, Hong Kong experienced only a US$78 billion contraction in lending overall last year, compared to a US$169 billion drop in 1998. Lending on the mainland also showed a sharp contraction, but the BIS said this was largely due to an increased repayment activity that was being seen throughout emerging markets. The BIS said that in Asia the increase in repayments was indicative of the growing momentum behind the economic recovery in the region.