NewChina, US hit Hong Kong banks with double whammy
Concern over exposure to mainland Chinese borrowers amid slowing economy and expected increase in US interest rates put city's lenders in a jam
Hong Kong banks are caught in a jam between the world's two biggest economies.
On the one hand, lenders in the city have never been more exposed to mainland China's slowing economy. As a matter of survival, local banks have lent aggressively across the border, but cracks are forming on the credit profiles of many of those borrowers.
The pain is not hard to see. Bank of East Asia, for example, notched a 2.65 per cent non-performing loan ratio for mainland China in the first half of the year, the lender disclosed this month.
On the other hand, the Federal Reserve in the United States is expected to gradually raise interest rates, a move that, due to Hong Kong's peg to the US dollar, will invariably increase the cost of credit from what have been historic lows for close to a decade.
Many of the troubled loans that borrowers have refinanced until now will go bad. As the excess credit recedes, pressure will mount on an overvalued property market where prices have climbed more than 170 per cent since early 2009.
"In fact, Hong Kong is caught in a pincer movement between a prospective US monetary policy tightening and the continued slowdown and travails of the mainland economy with which Hong Kong's economic cycle is increasingly more correlated," said Mole Hau, an Asia economist at BNP Paribas, in a note to investors.