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insight

Mainland-related exposures

Recently, there has been escalated interest in the credit expansion situation in Hong Kong, in particular to the growth in Mainland-related lending because such lending has contributed to a notable part of the overall loan growth of our banking sector.  Readers may recall that the HKMA has repeatedly pointed out at our annual press briefing in recent years that monitoring and supervision of credit risks has been one of our major supervisory focuses.  In this short article, I try to summarise the relevant issues in a Q&A format to facilitate understanding of an important area of HKMA’s banking supervisory work.  Hope this would help readers better understand and analyse the risk landscape involved.


1. Are banks in Hong Kong highly exposed to customers from Mainland China? There are many numbers quoted in the press and what exactly is the level of the exposures?

Hong Kong is a regional hub for financial intermediation.  The role has become more prominent in recent years as a result of Hong Kong’s increasing financial and economic integration with Mainland China and the continuous economic growth of the latter.  Local and international corporates utilise our platform to raise funds for supporting their business ventures in the Mainland, whereas Mainland enterprises obtain funds to finance their business expansion and acquisitions both on the Mainland and in other markets.

On lenders’ side, foreign banks including in particular those from Japan, Singapore, Australia and the United States recognise the unique advantage of Hong Kong and have, in recent years, increasingly participated in financial intermediation activities using their Hong Kong branches. 

The increase in Hong Kong banking sector’s Mainland-related lending is thus a natural consequence of the growth of the Mainland economy and development of Mainland corporates.   It also reinforces Hong Kong’s role as a significant international financial centre.  It is of course important to ensure that, in developing Hong Kong's role in this regard, the risks involved, including in particular credit and liquidity risks, are properly managed.  It is for this reason that the HKMA has stepped up its supervisory efforts in credit risk management over the past few years.

At the end of 2013, Hong Kong banking sector’s total Mainland-related customer loans amounted to HK$2,276 billion.  This figure excludes trade finance loans of HK$313 billion.  The following breakdown of the number will help you better appreciate how corporates and banks from Mainland, Hong Kong and other markets utilise our financial intermediation platform.

Table 1A: Hong Kong banking sector’s Mainland-related loans by different types of banks at end-Dec 2013

HK$

Foreign bank branches

970 bn

Hong Kong incorporated banks

830 bn

Hong Kong incorporated banks’ Mainland subsidiaries

476 bn

Total

2,276 bn

Table 1B: Mainland-related loans by different types of borrowers at end-Dec 2013 (Note)

HK$

Mainland non-private enterprises

1,290 bn

Mainland private enterprises

488 bn

Non-Mainland entities

811 bn

Total

2,589 bn

Note: Breakdown of Mainland-related loans by borrower types includes trade finance loans of HK$313 billion.


2. What are the relevant considerations when assessing Mainland risks to the Hong Kong’s banking sector? How much pressure the Hong Kong banking sector is now facing? How is HKMA monitoring and addressing the risks related to Mainland exposures?

The risk profile of Mainland related lending is basically that of corporate lending, and is very different from credit risk involving homogeneous products such as residential mortgage loans.  Mainland-related lending encompasses a high degree of heterogeneity with regard to lender types, borrower industries, loan use, and credit risk mitigations.  Therefore, from the perspective of a banking supervisor, it is not appropriate to manage the risks of Mainland-related lending using across-the-board hard limits.  The supervisory focus should be on the robustness of banks’ risk management systems, including in particular the effectiveness of credit risk and liquidity risk management, and the resilience of banks to possible credit loss in the event of deterioration in loan quality.

We have also stepped up our supervisory efforts on banks’ credit risk management since 2010 in light of the significant credit growths.  One of our supervisor focuses in recent years has been on general credit risk management, including Mainland-related credits.  These efforts include:

  1. Regular as well as thematic onsite examinations on banks’ credit underwriting processes and we have not identified major weaknesses;
  2. Banks with high loan growth are subject to the Stable Funding Requirement since the fourth quarter of 2013 to ensure that their loan growth is supported by adequate long-term funding and would therefore be more sustainable against possible future deterioration in liquidity situation; and
  3. Regular supervisory stress-testing is also conducted to assess banks’ resilience to credit shocks.

The results of our supervisory work suggest that the risks of Mainland-related loans are properly managed.  The HKMA will continue to monitor closely the development and the effectiveness of banks’ risk management systems including those of Mainland-related lending activities.


3. How exposed are banks in Hong Kong to banks on the Mainland?

At the end of 2013, Hong Kong banks’ claims on Mainland banks amounted to HK$2,582 billion.  These claims primarily arose from normal interbank and investment activities, and mainly comprise the following:

  1. Placement of surplus RMB liquidity of Hong Kong banks with the Peoples’ Bank of China and their Mainland correspondent banks;
  2. Funding support by Hong Kong incorporated banks to their Mainland banking subsidiaries from time to time;
  3. Claims on Mainland banks arising from Hong Kong banks discounting letter of credits issued by Mainland banks; and
  4. Investment in debt securities issued by Mainland banks

Among the HK$2,582billion, 80% (HK$2,060 billion) are claims on the top 5 Mainland banks.  The remaining 20% (HK$521 billion) are on other Mainland banks, the majority of which (HK$410 billion) are exposures to banks which maintain branches in Hong Kong and therefore meeting our licensing criteria.


4. Is it true that a large chunk of Hong Kong banking sector’s Mainland-related exposures is hot money?

Hot money is a loosely defined concept.  Apparently, some analysts regard all Hong Kong banking sector’s claims on Mainland banks and non-bank customers as hot money.  This approach is clearly too extreme and cannot form the basis for any reasonable analysis.

Based on our supervisory work, we are satisfied that Mainland-related lending is generally supported by genuine economic activities.  Moreover, a portion of the lending was for use outside Mainland and therefore does not even involve funds flowing into the Mainland.  Also, some of the claims are a natural result of healthy market development.  A clear case in point is the development of the RMB offshore market, as a result of which banks in Hong Kong will deposit surplus RMB funds to their Mainland correspondent banks and the Peoples’ Bank of China.

5. What is the credit risk landscape of the Mainland related lending?

At the end of 2013, the classified loan ratio of the Hong Kong banking sector’s Mainland-related lending portfolio stood at 0.29%, lower than that of the sector’s total lending portfolio (0.48%).  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.


6. Do you find it alarming to see our Mainland related exposures amounting to 165% of Hong Kong’s GDP?

As a major regional platform for financial intermediation, banks in Hong Kong ranked 4th in the world (after Japan, Germany and the UK) in terms of provision of net funding to other markets.  It is also relevant to note that foreign bank branches are making use of the Hong Kong platform for expanding their Mainland related business: their share of Mainland-related loans stood at 43% of total Mainland-related loans at the end of 2013. Therefore, it is really not meaningful to use Hong Kong's GDP as a basis for assessing the level of exposures to the Mainland, and certainly too, to any parts of the world.  The supervisory efforts of HKMA have always focused on the robustness of banks’ credit risk and liquidity risk management.


Hong Kong is playing a unique role of financial intermediation in the region and it is natural that banks in Hong Kong are more engaged in Mainland-related lending.  Moreover, as Mainland corporations expand their operations overseas, banks in Hong Kong are in a good position to support the funding needs of these corporations.  Based on the outcome of our on-site examinations and off-site reviews, the credit risks of the banking sector in Hong Kong are properly managed.  There is of course no room for complacency.  We will continue with our supervisory efforts to ensure that banks will uphold their credit underwriting standards and prudently manage their liquidity risks.


Powerpoint presentation on Mainland-related exposures on 15 April 2014 (figures as at end-2013)

Updated information on Mainland-related exposures (figures as at end-March 2014)

 

Arthur Yuen
Deputy Chief Executive
15 April 2014

Last revision date: 15 April 2014
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