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

At Khmer Rouge Court, Long-Awaited Verdict Approaches

First phase of trial, which is coming to an end, has focused on forced exodus of Phnom Penh in 1975 - and now many are hopeful justice will be served More

Video When Fighting Eases, Gazans Line Up at Bakeries

When there is a lull in the conflict, residents who have been hunkered down in their apartments rush out to stock up on food and other necessities More

Video Information War Rages Alongside Real One in Ukraine

Downing of Malaysian airliner, allegations of cross-border shelling move information war in war-torn country to a new level More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Information War Rages Alongside Real One in Ukrainei
X
Al Pessin
July 31, 2014 8:13 PM
The downing of the Malaysian airliner two weeks ago, and allegations that Russians are shelling Ukrainian troops across the border, have moved the information war swirling around the Ukrainian conflict to a new level. VOA's Al Pessin reports from Kyiv.
Video

Video Information War Rages Alongside Real One in Ukraine

The downing of the Malaysian airliner two weeks ago, and allegations that Russians are shelling Ukrainian troops across the border, have moved the information war swirling around the Ukrainian conflict to a new level. VOA's Al Pessin reports from Kyiv.
Video

Video When Fighting Eases, Gazans Line Up at Bakeries

When there is a lull in the conflict in Gaza, residents who have been hunkered down in their apartments rush out to stock up on food and other necessities. Probably the most important destination is the local bakery. VOA’s Scott Bobb reports from Gaza City.
Video

Video US-Funded Program Offers Honduran Children Alternative to Illegal Immigration

President Obama and Central American leaders recently agreed to come up with a plan to address poverty and crime in the region that is fueling the surge of young migrants trying to illegally enter the United States. VOA’s Brian Padden looks at one such program in Honduras - funded in part by the United States - which gives street kids not only food and safety but a chance for a better life without, crossing the border.
Video

Video 'Fab Lab' Igniting Revolution in Kenya

The University of Nairobi’s Science and Technology Park is banking on 3-D prototyping to spark a manufacturing revolution in the country. Lenny Ruvaga has more for from Nairobi's so-called “FabLab” for VOA.
Video

Video Gazans in Shelled School Sought Shelter

Israel's air and ground assault against Hamas-led fighters in Gaza has forced many Palestinians to flee their homes, seeking safety. But safe places are hard to find, as VOA’s Scott Bobb reports from Jabaliya.
Video

Video Rapid Spread of Ebola in West Africa Prompts Global Alert

Across West Africa, health officials are struggling to keep up with what the World Health Organization describes as the worst ebola outbreak on record. The virus has killed hundreds of people this year. U.S. President Barack Obama and other world leaders are watching the developments closely as they weigh what actions, if any, are needed to help contain the disease.
Video

Video Michelle Obama: Young Africans Need to Embrace Women's Rights

U.S. first lady Michelle Obama urged some of Africa's best and brightest to advocate for women's rights in their home countries. As VOA's Pam Dockins explains, Obama spoke to some 500 participants of the Young African Leaders Initiative, a six-week U.S.-based training and development program.
Video

Video Immigrant Influx on Texas Border Heats Up Political Debate

Immigrants from Central America continue to cross the U.S.-Mexico border in south Texas, seeking asylum in the United States, as officials grapple with ways to deal with the problem and provide shelter for thousands of minors among the illegal border crossers. As VOA's Greg Flakus reports from Houston, the issue is complicated by internal U.S. politics and U.S. relations with the troubled nations that immigrants are fleeing.
Video

Video Study: Latino Students Most Segregated in California

Even though legal school segregation ended in the United States 60 years ago, one study finds segregation still occurs in the U.S. based on income and race. The University of California Los Angeles Civil Rights Project finds that students in California are more segregated by race than ever before, especially Latinos. Elizabeth Lee reports for VOA from Los Angeles.

AppleAndroid

World Currencies

EUR
USD
0.7305
JPY
USD
101.53
GBP
USD
0.5830
CAD
USD
1.0656
INR
USD
60.075

Rates may not be current.