IMF latest to warn of Hong Kong banks' growing mainland exposure

Loan quality of city's banks may deteriorate this year as credit tightens on the mainland and marginal borrowers spill over to Hong Kong

PUBLISHED : Wednesday, 09 April, 2014, 1:18pm
UPDATED : Thursday, 10 April, 2014, 1:25am

The International Monetary Fund has warned of Hong Kong banks' rising exposure to mainland debt, saying loan growth to mainland entities has been "rapid" and now comprises 19 per cent of local institutions' total assets - excluding loans to other banks.

"While deepening integration suggests that financial linkages will continue to grow, the large exposure requires close monitoring and co-operation with mainland supervisors," the IMF said in a report.

The report by the agency, which is broadly tasked with the job of promoting international financial stability, comes as bankers said the Hong Kong Monetary Authority has informally cautioned them to tighten the approvals process on loans to mainland firms. The authority is worried China's shadow banking clampdown will send lower-grade borrowers spilling into Hong Kong, said bankers.

"Banks have been asked [by the HKMA] to watch their China exposure, to make sure they are well covered and they have adequate security. The concerns are that Chinese liquidity is tightening, the economy is slower and shadow banking is shutting down, so [the HKMA] doesn't want bad borrowers from China coming to Hong Kong and flooding the system," said a head of Asia-Pacific loans syndication at a European bank.

A Standard & Poor's report projects that the loan quality of the city's banks will deteriorate in 2014 as more mainland firms borrow from Hong Kong banks.

"In the unlikely event of a hard downturn in China [with GDP growth below 5 per cent], Hong Kong's economy and its banking sector will suffer severely because of the close ties between the two systems," S&P's report said.

Loans in the Hong Kong banking system grew about 16 per cent in 2013, said S&P. Loans from Hong Kong banks grew 22 per cent in February over the previous month, according to HKMA data.

Sonny Hsu, a banking analyst for Moody's, said the HKMA has special teams examining banks' exposure to mainland credit.

"We have a negative outlook on nine out of 17 [Hong Kong] banks we cover. The growing integration between Hong Kong and China means that any slowdown in the mainland economy can have a negative impact on the Hong Kong banking system," he said.

Hsu said Hong Kong banks have increased lending to mainland firms in recent years, and pointed to trade finance as an example.

Mainland officials have relaxed foreign exchange controls such that mainland firms no longer needed regulators' approvals to arrange trade finance in Hong Kong and transfer such funds to the mainland, he said.

Hsu said Hong Kong banks' trade finance grew by 7.5 per cent in the first two months of 2014, largely thanks to a boom in such loans to mainland firms.

The Bank for International Settlements said there is US$430 billion in loans outstanding from Hong Kong banks to mainland entities. However, the HKMA said only US$110 billion relates to non-bank debts.

"Therefore, the US$430 billion figure includes normal bank lending activities and support for mainland companies operating in China. The HKMA doesn't think this is hot money," said an HKMA spokesman.