International Monetary Fund warns Hong Kong over mainland exposure

The mainland is now Hong Kong's most systemically important exposure in terms of a potential shock to interbank markets, the International Monetary Fund said yesterday, urging the city's de facto central bank to remain focused on mainland lending exposures.

"Surveillance and supervision of mainland exposures should remain a key supervisory priority for the Hong Kong Monetary Authority, including effective co-operation with mainland supervisors," the IMF said in report released yesterday.

Under an extreme scenario presented in the IMF analysis, if the default rate in the mainland banking system's interbank obligations hit 80 per cent, the losses because of Hong Kong banks' exposure to the mainland interbank market would wipe out all the capital in the city's banking system.

The IMF said the HKMA should work with mainland regulators to facilitate an orderly resolution of distressed assets and address any weaknesses in banks' balance sheets.

The exposure of Hong Kong's banks to mainland companies has soared since the middle of last year, when a tightening of onshore liquidity saw many mainland firms looking offshore for funding.

The Hong Kong financial system's external claims on the mainland are now about 160 per cent of the city's gross domestic product, with 120 per cent comprised of claims on banks and 40 per cent claims on non-bank institutions, the IMF said.