The View | Why Hong Kong's RMB sweet spot will sour

Hong Kong banks are awash with cheap funds, and some of this liquidity has unsurprisingly been spraying across the border. The result is higher-risk premiums and risk warnings, such as Moody's reiteration last week of its negative outlook on Hong Kong banks because of their widening mainland exposure.

Is it possible that the risks are being exaggerated - that Hong Kong banks should jump on any opportunity to expand into a market that is effectively cut off to the rest of the world?

So far, the ventures have paid off, with the city's retail banks making a killing in the mainland over the past few years. This includes last year's pre-tax operating profit rise of 22 per cent for the sector, in no small part from mainland-related gains. Most of Hong Kong's cross-border exposure has been in the interbank market.

The mainland's capital account is still pretty closed but is opening ever wider, giving Hong Kong financial institutions a near-monopoly in cross-border yuan trade settlement and the offshore yuan asset market.

In turn, this means Hong Kong banks have front-row seats for any arbitrage opportunities between onshore and offshore yuan funding rates.