Hong Kong's trade-related exposure to China to grow 20% annually: Fitch

Here are more indications that HK's trade finance is becoming more China-biased.

Fitch Ratings says in a new report that Hong Kong banks' trade finance will continue to grow steadily and become more China-biased. In addition, banks will continue to expand their non-trade related China businesses as the two economies further integrate and domestic lending remains muted. This could increase banks' risk profiles and pressure ratings, unless managed prudently.

Fitch expects Hong Kong banks' trade-related exposures to grow at a healthy pace at about 20% per annum in 2012-2013. Expansion into China appeals to Hong Kong banks due to increasing domestic competition. Given their franchise in China and/or international connectivity, subsidiaries of Chinese banks and large global banks are best positioned to capture growth in this market.

The 2010-2011 trade finance boom, triggered by interest and foreign-exchange rate arbitrage transactions, is unlikely to continue. Rather, growth is likely to be underpinned by genuine trade volumes as expectations for the renminbi to appreciate wanes and lending restrictions for Chinese banks ease.

Hong Kong banks' loss rates for trade-finance products have generally remained low. A Fitch survey of the rated banks shows that credit losses are well covered by trade-finance revenues (1%-3% of total exposure in H112 if annualised) and no banks reported operational losses. Guarantees and standbys provided to cover transactions likely involving Chinese companies had the highest loss rate among trade-finance products in 2010-11.

Fitch believes the introduction of Basel III will not have a significant negative impact on Hong Kong banks' trade finance growth, despite industry concern. Hong Kong banks' capital charges are likely to remain between 2%-8% for on-balance-sheet items and below 2% for off-balance-sheet products.