Hong Kong Loan Risk to China Manageable, Central Bank Says

Risks posed to Hong Kong banks from Chinese lending are manageable and supported by “genuine” economic activity, the city’s central bank said, as it sought to allay concerns over exposure to the mainland, where bad loans are rising.

Banks in Hong Kong, including foreign lenders’ branches, had loaned HK$2.28 trillion ($294 billion) to Chinese customers by the end of 2013, according to a slide presentation by the Hong Kong Monetary Authority today. That’s up from HK$1.75 trillion in 2012, the HKMA said in an e-mail later. The classified loan ratio, a gauge of non-performing assets, for mainland lending was 0.29 percent, less than the 0.48 percent for the city’s banking industry, the HKMA said.

Hong Kong banks have increased loans to Chinese customers as mainland growth accelerated and as links between the two economies expanded amid increased global usage of the yuan. Credit Suisse Group AG said last month Hong Kong banks’ exposure to China exceeded 140 percent of the city’s gross domestic product, while the International Monetary Fund said the lenders’ rising assets in China require close monitoring.

“We have been looking at credit growth for four years,” Arthur Yuen, the HKMA’s deputy chief executive, said at a briefing in the city today. “We have tracked the source of the growth and we think it’s a very logical source of growth.”

Yuan Deposits

Neither Yuen nor the slide presentation referred to any bank directly. Industrial & Commercial Bank of China Ltd., located in Beijing, and London-based HSBC Holdings Plc (5) are the largest bank stocks traded in the city by market value.

The jump in Hong Kong banks’ China-related assets in the past four years was mostly due to the build-up of yuan deposits in the city, Yuen said. The lenders tend to park excess yuan at corresponding banks in China or with clearing banks. Banks’ increased holdings of bonds traded in China’s interbank market and trade-related activities are also among the reasons for the increase, he said.

The total lending to Chinese customers as of the end of last year didn’t include HK$313 billion of loans for trade finance, according to the HKMA.

Hong Kong-based branches of foreign banks accounted for about 43 percent of the loans made to mainland customers, the HKMA’s slides show. Banks incorporated in Hong Kong represented 36 percent, while their mainland subsidiaries accounted for 21 percent, the HKMA said. Chinese state-owned enterprises represented 50 percent of the borrowing including trade finance, while private entities took up 19 percent.

“Lending is really a function of demand and supply,” Yuen said. “We noticed there’s strong demand from mainland customers and we also want it to be run properly.”

Mitigating Risks

The risks associated with about 60 percent of the mainland loans were mitigated though bank guarantees and collateral, according to Yuen.

Sour debt at Chinese banks increased for the ninth straight quarter to 592.1 billion yuan ($95 billion) as of Dec. 31, the highest level since the 2008 financial crisis, highlighting pressures on asset quality as the world’s second-largest economy slows. Economists surveyed by Bloomberg are predicting growth of 7.4 percent this year, which would be the slowest pace since 1990.

Yuen said the HKMA is also reviewing a stable-funding requirement placed on all banks in the city this year, an evaluation that should be completed in about a month.

Under the requirement, banks with loan growth exceeding 20 percent on an annualized basis will need to cover the lending by longer-term funding. The HKMA is reviewing the 20 percent benchmark based on first-quarter lending figures and after credit growth grew an annualized 44 percent in January.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net Darren Boey, Tan Hwee Ann

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