A widely circulated research report is predicting a “cataclysmic recession” in Hong Kong . The basic argument is that Hong Kong has an enormous private-sector debt problem, manifested by its high credit-to-GDP ratio, and that the Hong Kong private sector “may perpetually leverage itself” to a point that it eventually precipitates what would probably become a “cataclysmic recession”. This line of argument is based on misinformation, a highly questionable theory and a misunderstanding of how Hong Kong functions as a global financial centre. It ignores the fact that Hong Kong is a global financial centre where banking sector assets and liabilities are extended far beyond the local economy. For example, Hong Kong’s total outstanding commercial bank assets amount to nearly US$3.4 trillion, about 10 times the city’s gross domestic product of US$360 billion. Such a large loan book only underscores the fact that offshore banking is the core business of Hong Kong’s banking system. Hong Kong’s situation is no different from New York City, also a global financial centre. For example, five of the top 10 US commercial banks are domiciled in New York City, with combined total assets close to US$8 trillion. Meanwhile, the top 10 foreign banks’ total assets in their New York offices were estimated at US$1.17 trillion in 2018. These 15 deposit-taking institutions alone have a combined loan book of more than US$9 trillion, which is about five times New York City’s economy of US$1.8 trillion. Needless to say, if all bank assets of all commercial banks operating in New York are included, the credit-to-GDP ratio for the New York metropolitan area will be extraordinarily high. All of this is to say that it is fundamentally flawed to look at the gross credit-to-GDP ratio of a global financial centre without considering the reason for the huge loan books. As far as economic stability is concerned, a much more relevant measure is non-financial-sector debt. For financial centres like Hong Kong, the story is complicated. Hong Kong’s total non-financial-sector private-sector debt, including bank credit, stands at 300 per cent of GDP, according to the International Monetary Fund, of which 75 per cent is household debt, mostly mortgages, 130 per cent is local business loans and the rest, 95 per cent, is credit extended to non-residents. In other words, when combining household debt and local business loans, Hong Kong’s non-financial private debt-to-GDP ratio is about 205 per cent, which is comparable to America’s 210 per cent, though somewhat higher than Singapore’s 175 per cent. How big is China’s debt, who owns it and what is next? Most importantly, it is hard to know whether these ratios are too high in absolute terms. In fact, the debt-to-GDP ratio is the most overrated measure of financial stability there is. More often than not, the ratio tells us nothing about the risk or vulnerability of an economy. In the late 1990s, many in the financial industry fretted about Japan hitting a debt wall, as the country’s public sector debt-to-GDP ratio climbed to 100 per cent, the highest in the developed world. Most economists were convinced that a debt crisis would cause the yen to collapse and send Japanese bond yields skyrocketing. Today, Japan’s public debt-to-GDP ratio stands at 260 per cent, while bond yields are at zero and the yen is as strong as ever. The Japanese experience suggests that the debt-to-GDP ratio tells us very little about the systemic vulnerability of an economy, which has more to do with the quality of the credit and the ability to service it than just the amount. Debt occurs because savings need to be transformed into investment. As such, the levels of debt in an economy is determined by two key factors: the national savings rate, and the structure of financial intermediation. Generally speaking, the higher the national savings rate, the higher the debt creation. This is simply because more savings need to be channelled into investments. Most Asian economies have rather high savings rates and, as such, their debt creation is usually high and their domestic interest rates are usually low. Japan, Hong Kong, Singapore, South Korea, Taiwan, and China all have fairly high debt-to-GDP ratios. In the meantime, unlike the US where financial intermediation is mostly done through capital markets, most Asian economies rely heavily on banks for resource allocation, leading to a high credit- or debt-to-GDP ratio. In fact, financial crises often occur in countries with low levels of debt, high interest rates and inadequate domestic savings. Therefore, focusing on the debt-to-GDP ratio as a gauge of economic and financial instability is often very misleading. As far as Hong Kong’s banking system is concerned, lending institutions have had an impeccable track record of weathering global economic and financial storms. For example, during the 1998 Asian financial crisis, Hong Kong residential property prices collapsed by 60-70 per cent, but the mortgage loan delinquency rate only rose to 1.5 per cent. This contrasts sharply with the US during the 2008 housing crisis, when the mortgage delinquency rate shot up to over 4.7 per cent. Today, Hong Kong’s mortgage delinquency rate stands at 0.03 per cent in the middle of the Covid-19 pandemic, while it has soared to over 3.7 per cent in the US from the post-financial crisis lows of 1.5 per cent. The report predicting a cataclysmic recession in Hong Kong does not seem to understand that the quality and serviceability of debt are crucial, not the absolute level. Hong Kong has its own unique economic and financial problems, including high property prices and income inequality, but its financial system is sound and domestic total debt levels are not out of whack with other high-income economies, and its bank debt is not out of line with other financial centres. Importantly, Hong Kong is a special administrative region of China – Beijing would undoubtedly step in to underwrite any major financial problems that could threaten Hong Kong’s economic and financial stability. In other words, a “cataclysmic recession” is simply a sensationalist assertion with little substance. Chen Zhao is founding partner and chief strategist of Alpine Macro