Do banks have reason to fear as Chinese lending accelerates?

Mainland Chinese exposure accounted for nearly a third of total assets.

Banks in Hong Kong continue to seal increasingly tight links with China after overall Mainland Chinese exposure (MCE) rose 2.3% in the first half of 2018, according to Fitch Ratings.

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The volume of lending to private Mainland entities also rose by 12.1% in H1 as Hong Kong trails only behind Macau as the banking system with most concentrated exposure to Mainland China. Hong Kong’s MCE accounts for nearly a third (29%) of total banking assets.

HSBC, Standard Chartered Bank (Hong Kong) and Hang Seng Bank all increased their MCE by around 4-5% whilst the branch and subsidiary of DBS grew its MCE by more than 15%. Even the non-bank MCE of Hong Kong banks have doubled from 7% in 2016 to 15% in 2017, data from KPMG show.

“Hong Kong banks would therefore be vulnerable to asset quality and liquidity pressures in the event of a sharp deceleration in China's economy, which is not our core scenario,” the research firm said in a report.

As of the moment, however, MCE of Hong Kong banks held up against slippages as impaired loans stand below 1% for almost all banks. Fitch also expects little deterioration in asset quality to take place in the second half of 2018.

Although China-related lending is not negative in itself, growing exposure to the slowing economy without ‘adequate controls and capital buffers’ could lead to a negative ratings impact, warned Fitch Ratings. “That said, we continue to see MCE as Hong Kong banks' biggest concentration risk, even if it has performed well so far,” the firm said in a June report.