Foreign and Hong Kong banks’ mainland China lending hits record high
Easier access to funds in Hong Kong and Chinese companies’ international ambitions drive trend
Foreign bank’s exposure to mainland China stood at US$1.89 trillion – a record high – at the end of the first half of this year, according to data from ratings agency Fitch.
Tighter liquidity on the mainland, easy liquidity in Hong Kong and Chinese corporates’ growing global ambitions contributed to a rebound after a slower 2015 and 2016, Fitch said.
Another factor for this year’s high was international banks looking to mainland China for growth, although the ratings agency said a rapid expansion in such lending would bring higher risks with it.
“It is hard to say whether the rewards for foreign banks of lending more on the mainland outweigh the risks, but we are less sceptical now than we were a few years ago, when banks hadn’t experienced any major losses and much of the lending was to companies hoping to take advantage of an appreciating yuan,” said Sabine Bauer, senior director, financial institutions at Fitch.
This strategy came to a sharp halt in 2015, when the yuan stopped appreciating against the US dollar and started to fall in value. “The unwinding of some of that lending is part of the reason for the slow down in foreign banks’ mainland China exposure in 2015 and 2016,” Bauer added.
“This latest high point in lending is driven more by companies’ real needs.”
Lending to the mainland from Hong Kong banks was worth US$996 billion at the end of June, also a record high.
Around two-thirds of this was from subsidiaries and branches of mainland banks operating in Hong Kong, who have been expanding aggressively.
Mainland exposure accounted for 31 per cent of Hong Kong’s total system-wide assets, up from 27 per cent at the end of 2016.
Raymond Yeung, the chief economist for Greater China at ANZ, said there were three factors behind the growth in mainland lending from Hong Kong banks.
“Interest rates are on their way up as the Federal Reserve starts to shrink its balance sheet, so if I were a corporate treasurer, I would have looked to lock in a good borrowing rate early in the year,” he said.
“Also, we have seen tighter liquidity on the mainland and loose liquidity in Hong Kong, so it is easier to borrow in Hong Kong, and as well as that if a Chinese company wants to spend the money outside China, there are fewer restrictions if the company borrows in Hong Kong, than if it borrows in China and then looks to transfer the money offshore.”
Strict controls placed on capital leaving the mainland by Chinese authorities have had an additional effect.
“Because of the concerns about capital outflows, Chinese authorities have been encouraging companies to borrow offshore to invest within China, as that then shows up as a capital inflow,” said Carrie Li, economist at OCBC Wing Hang Bank, although she said the factors driving mainland companies to borrow offshore were now starting to decline.
“Concerns about capital outflows have declined, and liquidity on the mainland was looser in the third quarter, which should lead to slowing offshore borrowing,” she said.
Hong Kong and international banks have been looking to Asia, including mainland China, for growth at a time when returns in their home markets, especially in Europe, remain sluggish.
Last week, Stuart Gulliver, group chief executive of HSBC, the largest bank in Hong Kong and Europe, said the bank’s “pivot to Asia”, announced in 2015, had driven more than 70 per cent of the group’s adjusted profit in the first nine months of this year, and that it had lent US$1.1 billion more in the third quarter this year in south-eastern China’s Pearl River Delta than it had in the same period in 2016.