Surging Loans to China Could Pose a Risk to Hong Kong’s Economy by Chris Cruse and Associates Real Estate Broker

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Surging Loans to China Could Pose a Risk to Hong
Kongs Economy
Chris Cruse and Associates Real Estate Broker
http//blogs.wsj.com/economics/2014/04/17/surging-
loans-to-china-could-pose-a-risk-to-hong-kongs-eco
nomy/
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Slowing growth in Chinas massive economy has
raised concerns that the rest of Asia would
suffer if China continues to lose
momentum.   Rapid growth in lending to the
mainland would seem to put Hong Kong at
particular risk in case Chinas economy
experiences a hard landing.   Of course, few
analysts expect Chinese growth to slow sharply.
More likely is a gradual deceleration, after data
Wednesday showed Chinas gross domestic product
growth slowed to 7.4 in the first quarter of the
year, from 7.7 in the final quarter of
2014.   Most analyses have focused on how slower
Chinese growth would impact Asia through the
trade channel. Even by that metric, Hong Kong
which sends 28 of its exports to China would
appear to be among the most exposed. Other
economies with heavy export exposure to China
include Singapore, Taiwan, South Korea and
Vietnam, according to a recent report from
Capital Economics.
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  But the greatest risk for Hong Kong would
appear to be through the financial channel
Lending to mainland businesses by all authorized
institutions (AIs in the attached chart) has
surged from about 5 of total banking sector
assets in 2007 to nearly 20 today, according to
the Hong Kong Monetary Authority.   Given the
size of Hong Kongs economy relative to the
mainland and how much its lending to the
mainland, it does look quite worrying, Capital
Economics analyst Julian Evans-Pritchard told The
Wall Street Journal. It has become quite a large
percentage of Hong Kong GDP. Foreign-currency
lending by banks in Hong Kong rose to a record
2.9 trillion Hong Kong dollars (US368 billion)
by the end of 2013, most of that to China,
according to the HKMA. Thats up from just HK486
billion in 2005, when China began loosening
restrictions on its currency. In its latest
Monetary and Financial Stability Report, issued
last month, the HKMA called banks rising
exposure to the mainland a key risk factor to
watch for.  
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  Total mainland-related exposure amounts to 165
of Hong Kong GDP, according to the HKMA though
it noted that 43 of the outstanding loans come
from foreign banks operating in Hong Kong,
rendering a comparison to the citys GDP less
relevant. In addition, some of those funds end up
being used outside the mainland, the HKMA
said. In any case, authorities dont see an
imminent danger. Just ahead of this weeks China
GDP release, Arthur Yuen, the HKMAs deputy chief
executive officer, called a news conference to
say the authority was on top of any risks from
mainland loans. Despite the absence of any
early signal of credit quality deterioration, the
HKMA will continue to closely monitor banks
asset quality and ensure banks are resilient to
credit loss throughout the economic cycle by
maintaining strong capital positions and, where
necessary and appropriate, regulatory reserves,
Mr. Yuen said in a statement.
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Bank of America Merrill Lynch analyst Marcella
Chow isnt quite so sanguine. Though she also
considers a hard landing unlikely, if Chinese
growth did slow sharply, she said, we could see
a sizeable increase in nonperforming loans from
the corporate loan book to mid-market enterprises
and Hong Kong corporates, which may have engaged
in speculative currency loans to benefit from the
USD/CNY carry trade. Ms. Chow estimates that
about 30 of Hong Kong banks loans go to China.
Stress tests conducted by Bank of America assume
that about 6 of uncollateralized loans could go
bad. In that case, the spillover effect from
further deterioration in the quality of Chinese
nonfinancial and financial corporations could be
substantial, she said, affecting Hong Kong
through trade, tourism, foreign direct investment
and financial channels.   But, Ms. Chow noted,
Hong Kong banks appear to be proactive about
managing the risks of their China exposure, as
they recognize the challenges related to
collateral enforcement or the use of judicial
procedures in the mainland.
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The real danger, said John Zhu, an economist at
HSBC in Hong Kong, would come if Chinas
real-estate market suddenly collapsed perhaps
due to a combination of falling prices and a
supply glut. Given the fact that so much of
Chinese citizens wealth is tied up in real
estate, a pricking of the real-estate bubble
could set in motion a rapid downward spiral for
consumption, investment and overall
growth.   Still, Mr. Zhu agreed with the HKMA
that theres no immediate risk to Hong Kongs
economy.   On the whole I think the risks are
there, but probably contained for now, he
said. Visit our website http//www.chriscrusere
alestate.com