News / Economy

Hong Kong's Soaring Bank Exposure to China Sparks Credit Concerns

FILE - The skyline of Hong Kong's business district.
FILE - The skyline of Hong Kong's business district.
Reuters
In just a few years, Hong Kong banks have ramped up lending to China from near zero to $430 billion, fueling concerns about their credit exposure to the mainland at a time when sliding economic growth and defaults are making investors nervous.
      
Even a modest increase in non-performing loans would have a significant impact on Hong Kong bank profits, suggesting the sector will be a sensitive indicator of China's debt markets in the year ahead.
         
A landmark domestic bond default earlier this month and headlines of bankruptcies - highlighted last week by Zhejiang Xingrun Real Estate Co - have underscored concerns that an unprecedented surge in company debt in China is now showing signs of unraveling.
      
"The quality of these loans extended by Hong Kong banks to Chinese companies has not been tested," said Mirza Baig, head of foreign exchange and interest rate strategy at BNP Paribas in Singapore. "That is a concern in the backdrop of the rapid rise in exposure."
      
Foreign bank claims on China hit $1 trillion last year, up from nearly zero 10 years ago, Bank of International Settlements data shows. The biggest portion of that is provided by Hong Kong, according to analyst estimates of the BIS data. The $430 billion in loans outstanding represents 165 percent of Hong Kong's GDP, figures in Hong Kong Monetary Authority (HKMA) reports show.
          
Data from the HKMA, the city's de-facto central bank, showed a similar astonishing rise. By the end of 2013, Hong Kong banks' net claims on China as a percentage of their total loan book was nearing 40 percent, compared with zero in 2010.
          
The rival financial center of Singapore has ramped up its China loans as well, but its exposure is the equivalent of 15 percent of its GDP, figures from its monetary authority show.
          
Local banks in both these centers have taken over lending that foreign banks once dominated, drawn by cheap funding rates following the global financial crisis, a voracious appetite from Chinese borrowers and healthy growth in the world's second-biggest economy.
          
"Hong Kong banks have pounced on arbitrage opportunities between on-and offshore renminbi funding rates," said Cathy Holcombe, a strategist at Gavekal Dragonomics in Hong Kong.
          
Currency exposure
          
There is no breakdown of the type of loans behind the $430 billion figure, but Stephen Long, managing director of financial institutions at Moody's Investor Services, said "a substantial part" is in lower-risk categories such as trade finance. This would include loans to Hong Kong blue-chip companies operating on the mainland or loans supported by guarantees from Chinese banks.
      
However, trade finance may also hide speculative flows that bet on a rise in the yuan - a popular trade encouraged by the currency's 2.9 percent rise against the dollar last year. In this trade, investors and companies falsify trade receipts to convert foreign currency into yuan and avoid capital controls.
          
This year's slide in the yuan may also pinch debtors' ability to service their loans. The yuan has dropped nearly 3 percent, wiping out its 2013 gains, putting it on track for its worst March quarter since 1992.
          
"Most of these loans are not hedged completely on a currency basis even if they are collateralized and the currency volatility means some of these banks may be sitting on large currency losses," said a trade banker at a large European bank. He declined to be identified because he was not authorized to speak openly to the media.
          
Stock and credit analysts also say a big chunk of the loans has ended up in China's property and financial sectors, as well as industries with surplus production capacity, such as steel - all areas where regulators are trying to control lending.
          
To be sure, capital buffers at Hong Kong banks are much higher than minimum international standards and the central bank has not shown any alarm about the lending.
          
The HKMA said it has been "closely monitoring" the sector's credit exposure and it expects banks "to maintain sufficiently robust system of controls to manage the specific risks that they are facing."
          
Investors are showing more concern though. An index of financial stocks in the main Hong Kong bourse had fallen by more than 13 percent this year through to the end of last week. It perked up on Monday on hopes for government stimulus to support the Chinese economy.
          
Analysts said Bank of East Asia and Bank of China (Hong Kong) have the biggest exposure to China among the lenders based in the territory, at 46 percent and 27 percent of their loan books, respectively. The latter is also the clearing bank for all yuan-related transactions appointed by the China's central bank. The banks did not return calls seeking comment.
          
Risks
          
Hong Kong's non-performing loans (NPLs) ratio is currently a record low of 0.5 percent. But if it returned to the long-term average of 3.5 percent, it would cut nearly 20 percent off current expectations for local bank pretax profits for the financial year starting this April, Barclays Capital said.
         
Larger global banks in Hong Kong, such as Standard Chartered Bank and HSBC, are less at risk because of their big balance sheets.
          
Under a scenario where NPLs return to 3.5 percent, Bank of East Asia would take a 10 percent hit to its pretax profit, while Dah Sing Financial Group and Wing Hang Bank could lose nearly a sixth, Barclays says. Dah Sing and Wing Hang did not return calls seeking comment.
          
Sharnie Wong, a banking analyst at Barclays, said the two biggest risks to asset quality of Hong Kong banks are a sharp downturn in China's economy and a rise in U.S. interest rates. The first factor could reduce the ability of borrowers to service their loans and the second point would raise bank funding costs, squeezing profit margins.
          
Although China's official NPL ratio is 1.0 percent, bankers estimate the real figure is anywhere between 5 percent and 10 percent.
          
Wong and other analysts argue that interest rates, and with them NPLs, are set to rise as rates globally increase, partly in response to healthier U.S. and European economies.
          
That means Hong Kong banks will have to put more aside to offset debt risks and so readings on their NPLs and provisions against bad debt will provide a window on the state of China's credit market.

You May Like

Analyst: Joint-Arab Military Force Poses Perilous Challenge

Although international forces are desperately needed to counter the threat of the Islamic State group, analysts say conflicting alliances could escalate fighting More

Asia’s Middle Class Changes Demand for Wheat Grain Exporters

Changes in tastes and diets are boon for wheat exporters such as Australia and the United States More

S. African Comedian Taking Over Popular TV Show

Mixed-race comedian Trevor Noah, who is loved for his edgy jibes about race and language, is taking the helm from Jon Stewart at The Daily Show in US More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Film Tells Story of Musicians in Mali Threatened by Jihadistsi
X
Greg Flakus
March 30, 2015 6:48 PM
At this year's annual South by Southwest film and music festival in Austin, Texas, some musicians from Mali were on hand to promote a film about how their lives were upturned by jihadists who destroyed ancient treasures in the city of Timbuktu and prohibited anyone from playing music under threat of death. As VOA’s Greg Flakus reports from Austin, some are afraid to return to their hometowns even though the jihadists are no longer in control there.
Video

Video Film Tells Story of Musicians in Mali Threatened by Jihadists

At this year's annual South by Southwest film and music festival in Austin, Texas, some musicians from Mali were on hand to promote a film about how their lives were upturned by jihadists who destroyed ancient treasures in the city of Timbuktu and prohibited anyone from playing music under threat of death. As VOA’s Greg Flakus reports from Austin, some are afraid to return to their hometowns even though the jihadists are no longer in control there.
Video

Video With Coalition Airstrikes, Iraq Entering 'Last Page' of IS Battle

American warplanes joined Iraq's battle against the so-called 'Islamic State' in northern Iraq late Wednesday, as Iraqi ground troops launched a massive assault on Tikrit. Analysts say the offensive could take the coalition a step further towards Mosul, the largest city held by Islamic State forces. Others say it could also deepen already-dangerous sectarian tensions in the region. VOA's Heather Murdock has more from Cairo.
Video

Video Philippines Wants Tourists Spending Money at New Casinos

Tourism is a multi-billion dollar industry in the Philippines. Close to five million foreign visitors traveled there last year, perhaps lured by the country’s tropical beaches. But Jason Strother reports from Manila that the country hopes to entice more travelers to stay indoors and spend money inside new casinos.
Video

Video Civilian Casualties Push Men to Join Rebels in Ukraine

The continued fighting in eastern Ukraine and the shelling of civilian neighborhoods seem to be pushing more men to join the separatist fighters. Many of the new recruits are residents of Ukraine made bitter by new grievances, as well as old. VOA's Patrick Wells reports.
Video

Video Islamic State Prisoners Talk of Curiosity, God, Regret

Islamic State fighter, a prisoner of Kurdish YPG forces, asked his family asking for forgiveness: "I destroyed myself and I destroyed them along with me." The Syrian youth was one of two detainees who spoke to VOA’s Kurdish Service about the path they chose; their names have been changed and identifying details obscured. VOA's Zana Omer reports.
Video

Video Germanwings Findings Raise Issue of Psychological Testing for Pilots

More is being discovered about the co-pilot in the crash of Germanwings Flight 9525 in the French Alps. Investigators say he was hiding a medical condition, raising questions about the mental qualifications of pilots. VOA's Carolyn Presutti reports.
Video

Video Hi-tech Motorbike Helmet's Goal: Improve Road Safety

In cities with heavily congested traffic, people can get around much faster on a motorcycle than in a car. But a rider who is not sure of his route may have to stop to look at the map or consult a GPS. A Russian start-up company is working to make navigation easier for motorcyclists. Designers at Moscow-based LiveMap are developing a smart helmet with a built-in navigation system, head-mounted display and voice recognition. Zlatica Hoke has more.
Video

Video DOJ: Illinois National Guard Soldier Tried to Join ISIS

U.S. federal law enforcement agents arrested two suburban Chicago men accused of trying to join ISIS overseas, while also plotting attacks in the United States. As VOA’s Kane Farabaugh reports from the Midwest state of Illinois, one of those arrested is a soldier of the Illinois National Guard.
Video

Video New Wheelchair Is Easier to Use, Increases Mobility

Traditional push-rim wheelchairs create a lot of stress for arm, shoulder and neck muscles and joints. A redesigned chair, based on readily available bicycle technology, radically increases mobility while reducing the physical effort. VOA’s George Putic reports.
Video

Video Liberia's Almost Last Ebola Patient Grateful but Still Grieving

Beatrice Yardolo was to make history as Liberia’s last Ebola patient. Liberians recently started counting down 42 days, the period that has to go by without a single new infection until the World Health Organization can declare a country Ebola-free. That countdown stopped on March 20 when there was another new case of Ebola, making Yardolo’s story a reminder that Ebola is far from over. Benno Muchler reports from Monrovia.
Video

Video Cambodian Land Grabs Threaten Traditional Communities

Indigenous communities in Cambodia's Ratanakiri province say the government’s economic land concession policy is taking away their land and traditional way of life, making many fear that their identity will soon be lost. Local authorities, though, have denied this is the case. VOA's Say Mony went to investigate and filed this report, narrated by Colin Lovett.
Video

Video Space Program Status Disappoints 'Last Man on the Moon'

One of the films that drew big crowds last week at the annual South by Southwest festival in Austin, Texas, tells the story of the last human being to stand on the moon, U.S. astronaut Eugene Cernan. It has been 42 years since Cernan returned from the moon and he laments that no one else has gone there since. VOA’s Greg Flakus reports.

VOA Blogs

Circumventing Censorship

An Internet Primer for Healthy Web Habits

As surveillance and censoring technologies advance, so, too, do new tools for your computer or mobile device that help protect your privacy and break through Internet censorship.
More

World Currencies

EUR
USD
0.9220
JPY
USD
119.88
GBP
USD
0.6757
CAD
USD
1.2640
INR
USD
62.626

Rates may not be current.