22 January 2019

Rising China exposure: what does it mean for banks?

Hong Kong lenders have become increasingly active in mainland China over the past few years. So, what does that heightened exposure mean for the sector and what are the implications for the players? To provide some answers, the Hong Kong Economic Journal’s Investor Diary column delved into the operations of The Bank of East Asia Ltd. (BEA, 00023.HK).

BEA extended about HK$164.4 billion (US$21.2 billion) in loans to mainland clients last year. The amount represents 35 percent of the bank’s total loans, while loans in Hong Kong and non-China overseas markets accounted for 52 percent and 13 percent respectively.

The bank is known to be relatively aggressive, but even generally speaking the sector as a whole has been marked by rising dependence on the mainland market.

Data from the Hong Kong Monetary Authority showed that as of the end of September last year, total lending to non-banks in the mainland by Hong Kong lenders rose 9 percent from a quarter ago to HK$3.5 trillion, representing 18.6 percent of the banking sector’s total assets.

Such high growth inevitably raises concerns about the risks that the mainland lending poses to the whole banking sector in Hong Kong.

Bank of England governor Mark Carney warned just before Christmas last year against risks of lending to mega developing countries overseas. The alert was purportedly based on a study by the Hong Kong banking watchdog about risks of offshore loans in China.

The situation is even more worrisome when reference is made to data compiled by Bloomberg. The amount of loans granted to China by developed countries after the global financial crisis has been surging drastically, especially since 2011. Those from the United Kingdom topped US$193 billion, leading other western countries.

Meanwhile, laggard Australia has been catching up in its lending to China, with the exposure now 3.3 times the level in 2011. But, given their reliance on short-term financing, Australian banks are exposed to higher risks of maturities mismatch.

Many Chinese firms, especially privately-owned entities face difficulties in getting loans from mainland banks. Foreign lenders, meanwhile, have been suffering from sluggish loan demand in their home markets after the 2008 global financial crisis. In this situation, increased lending by foreign banks to Chinese borrowers is not surprising at all.

That said, the increased credit risk is not easy to manage. BEA, for instance, saw its impairment losses almost double last year.

No one knows when the credit bubble in the mainland would burst. But with the world’s increasing exposure to China debt, if the bubble were to indeed pop, it could create a global scale banking crisis.

– Contact the writer at [email protected]


Freelance journalist

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