How Much Loan is from Banks in HK to Mainland China?

Recently, the Apple Daily [1] reported that the loans from the banks of Hong Kong to mainland China exceeded HK$4,000 billion (Figure 1), which caused heated discussion among the public in HK. The source of the information is trustworthy as it is mainly based on the contents of Chapter 5 (the Banking Performance) of the HKMA’s (2019) Semi-annual Report on Monetary and Financial Stability [2].

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Figure 1 The amount of loan from the banks in HK to mainland China. Source: Hong Kong Monetary Authority

Figure 2 shows the breakdowns of the related loans in recent years: the latest published “Mainland-related Lending” figures, as of December 2018, was HK$4,249 billion, of which HK$1,689 billion was loaned to mainland state-owned entities, and HK$1,203 billion was loaned to mainland private entities, and the rest HK$1,356 billion was loaned to non-Mainland entities (but for the use in the mainland).

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Figure 2 A breakdown of the amount of loan from the banks in HK to Mainland China. Source: Hong Kong Monetary Authority (2019) [2]

However, if the amount of loan to “Other non-bank exposures” to mainland China-related entities is included, then the total amount has exceeded HK$5,000 billion. Figure 3 shows that the “Other non-bank exposures” mentioned in the report amounted to HK$1,396 billion in December 2018.

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Figure 3 The amount of loan to Mainland China entities from Other non-bank entities in HK. Source: Hong Kong Monetary Authority [2]

It is not just the huge amount that draws the public attention, but the proportion of the mainland-related loans to total loans ratio is also important from the risk management perspective. The report mentioned that the loans provided by the banks in HK to mainland China accounted for about 16% of the total assets. The proportion does not seem to be alarming. However, if we consider the ratio of mainland loans to total loans, then it is about 40%, which is very high!

The figure is obtained from the Report on Hong Kong written by the International Monetary Fund (IMF, 2019) [3], as of June 2018, as shown in Figure 4.

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Figure 4 The proportion of HKSAR Banks’ Mainland Related Lending to Total Loans. Source: IMF (2019) [3]

It obviously implies that the loans of the Hong Kong banking system is over-concentrated, which renders it vulnerable to any financial shocks related to the mainland economy, and may result in a contagious financial crisis. In fact, the HKMA (2019) report mentioned that: “ The distance-to-default (DTD) index, a market-based default risk indicator, points to a broad-based increase in the credit risk of the Mainland corporate sector since April 2018” [2] The report states that since 2018, The bond default size and proportion in mainland China suddenly increased sharply (Figure 5).

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Figure 5 China’s mainland bond default size and proportion. Source: Hong Kong Monetary Authority [2]

In the past decade, due to the global implementation of quantitative easing policy, a large number of enterprises have borrowed heavily, and some of the loans have become potential bad debts as a result of risky investment decisions. It is also reported that many companies have borrowed money to buy back their own stocks so as to push up the stock price and to profit from it. Thus, the proportion of total corporate debt to GDP has risen sharply in recent years, becoming a high-risk area of the next bubble burst trigger.

Hong Kong’s massive lending to entities in mainland China has also led to a significant increase in the proportion of total mainland-related-debt to GDP. Figure 6 shows that the total debt of Hong Kong banks’ lending to the corporates in mainland China has increased to more than 250% of GDP, and this ratio had already exceeded 200% in 2011! Among them, the proportion of non-bank debts rose the most (red column), which may be related to the above-mentioned debts to the state-owned enterprises and private enterprises in mainland China from Hong Kong.

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Figure 6 The amount of loan from the banks in HK to mainland China entities as a percentage of GDP. Source: IMF (2019) [3]

The ratio of total corporate borrowings to total GDP in Hong Kong banks was about 320% at the end of 2017 (Figure 7), of which more than 250% were to companies in mainland China. Such a high proportion and highly concentrated debt sector for a single small economy can be very risky. These two risks have caused major concerns about the safety of the banking system in Hong Kong. In fact, due to the sharp rise in property prices in the past decade, household debt has risen to around 70% (Figure 7), and it has begun to be unhealthy; if corporate debt, household debt and government debt are added up, Hong Kong’s total debt accounts to GDP ratio exceeds 400%! It is even higher than that of China. The situation of HK is worrying.

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Figure 7 Hong Kong’s various types of debt to GDP ratio. Source: IMF (2019) [3]

[A Chinese version is available at 姚松炎 (2019) 香港銀行向中國內地相關貸款資料補遺,9月10日。 https://vocus.cc/eyanalysispoliecon/5d7724d9fd8978000127b846]

References:

[1] Apple Daily (2019) 【蘋果統計】香港金融業赤化 4萬億貸款「送中」 有銀行近半借予內地,9月8日。(Chinese) https://hk.finance.appledaily.com/finance/realtime/article/20190909/60018187?fbclid=IwAR2YNqhoc7rUv9gp3KGOUUcB6tqY_7RcDUYrnmTkraOmC-G3xJv7Ws7piKg

[2] HKMA (2019) Half-yearly Monetary and Financial Stability Report,Mar. https://www.hkma.gov.hk/media/chi/publications-and-research/quarterly-bulletin/qb201903/C_Half-yearly_201903.pdf

[3] IMF (2019) PEOPLE’S REPUBLIC OF CHINA — HONG KONG SPECIAL ADMINISTRATIVE REGION, IMF Country Report №19/20, Jan. https://www.imf.org/en/Publications/CR/Issues/2019/01/25/People-s-Republic-of-China-Hong-Kong-Special-Administrative-Region-2018-Article-IV-46539

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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