Banking & Finance

Hong Kong, China bank sectors vulnerable to crisis, says Bank of International Settlements

Rising debt and property prices – two major indicators of a crisis – “flashing red”

PUBLISHED : Monday, 12 March, 2018, 7:18pm
UPDATED : Monday, 12 March, 2018, 11:47pm

Hong Kong and China’s banking sectors are among those most vulnerable to a crisis because of rising debts, according to a report from the Bank of International Settlements.

BIS, known as the central bank for central banks, found that two key indicators suggesting a looming banking crisis were present in both economies, it said in quarterly report published on Sunday, which looked at early warning indicators of systemic stress.

“Canada, China and Hong Kong SAR stand out, with both the credit-to-GDP [gross domestic product] gap and the DSR [debt service ratio] flashing red. For Canada and Hong Kong, these signals are reinforced by property price developments,” said the report.

The two measures are different reflections of the level of debt in an economy, and the report found that they were good indicators of a coming banking crisis.

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Rising debts both in Hong Kong and the mainland are often flagged as a concern by analysts, though regulators in both jurisdictions have been taking steps to reduce them.

“There are certainly some headwinds facing the Hong Kong banking sector, such as the rising debt to GDP ratio – we are particularly concerned about high property prices – and also the growth in lending by Hong Kong banks to borrowers in mainland China, which have higher credit risks,” said Chung Hong-taik, a banking analyst at ratings agency S&P Global.

Hong Kong’s property prices are among the highest in the world, and property related lending accounted for 45 per cent of the banking sector’s loans in Hong Kong as of December 2017, according to S&P.

There are certainly some headwinds facing the Hong Kong banking sector

“However, Hong Kong banks have some of the best underwriting standards globally, and have been strengthening them further in the last few years under attentive regulatory supervision. This means we are not too concerned, and we have a stable outlook on all of the Hong Kong banks we cover,” Chung said.

On the mainland, regulators have become increasingly vocal about the risks of debt, with borrowing by individuals the latest target.

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“There has been a rapid growth in household debt, [including] borrowing to fund consumer spending, property purchases and investments. That’s very risky,” Guo Shuqing, chairman of the China Banking Regulatory Commission, said on Friday, on the sidelines of the National People’s Congress in Beijing.

The BIS created the early warning indicators by looking at past financial crises around the world, and they warned that it was possible that things could change in the future, and that the presence of an early warning indicator was not a guarantee of a coming crisis.

“Early warning indicators are not perfect … the probability of a financial crisis is around 50 per cent once we see an early warning signal, though it can take up to three years,” said Mathias Drehmann, one of the authors of the study.