Close Chinese financial ties are both boon and bane for Hong Kong banks

The mainland’s deleveraging programme will drive cross-border loan activity but pose risks to LGFVs.

Close financial ties with Mainland China offer both opportunity and risk for Hong Kong banks in 2018, according to S&P Global Market Intelligence.

Robust Chinese demand is set to drive expansion in loan growth between 10-12% in 2018 from 6.5% in 2016.

“Banks in the HKSAR benefit from ever-deepening economic and financial linkages between China and the SAR. Examples of such linkages include the Bond Connect and Share Connect schemes, renminbi internationalisation, the "Belt and Road" global trade initiative, and continued development of infrastructure connections between Guangdong province, Hong Kong, and Macau,” the credit agency noted.

The policy-induced deleveraging from the mainland to reduce systemic financial risks is also set to boost cross-border loan activity to banks in the SAR as growth picked up in 2017 following a sluggish performance in 2015 and early 2016.

As of September 30, 2017, total mainland-related lending was estimated at $523b (HK$4.1t) which is equivalent to around 16.7% of total assets.

However, such close ties of financial systems also pose the risk of credit losses for Hong Kong especially on loan exposure to China’s softening property market and local government financing vehicles (LGFVs).

“In addition, unexpected turbulence in China's economic rebalancing agenda--potential causes include slower economic growth, tightening funding conditions, or unexpected capital outflows--could damage Hong Kong's economy and affect the credit profiles of SAR borrowers,” S&P said, adding that this would raise credit costs.