Global Financial Strategy - Hong Kong banks 'too exposed to China'

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Hong Kong banks ‘too exposed to China’

Monday 24 October 2011 – by Karina Whalley

Hong Kong’s banks face the prospect of debt downgrades owing to their exposure to China’s uncertain financial market, according to Fitch.

The credit rating agency estimates that by next year Hong Kong banking assets’ gross exposure to China could rise to 35 per cent, up from 10 per cent in 2008.

Sabine Bauer, director of Fitch’s financial institutions team, said: “Fitch is seeing signs of the increasing influence of Chinese banking parents on Hong Kong subsidiaries, which could negatively influence efficiency or even reverse progress in key areas including risk management.”

Mainland credit exposure for the island’s banks have mostly been short-term, trade-related and collateralised. However, the operating environment is now weaker and China is suffering from corporate governance and transparency issues, it said.

“Hong Kong’s banks will likely cede some of their historical strengths of robust capitalisation and low risk appetite if rapid growth in the mainland causes them to lower their underwriting standards,” warned Bauer on Monday.

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The outlook for the Hong Kong banking sector is currently stable and Fitch reported that it still has adequate liquidity. But due to the financial system’s sensitivity to investor confidence in China as well as global risk aversion, this liquidity could tighten suddenly, warns the agency.

Fitch sees larger banks in Hong Kong as being best positioned to maintain or expand market share while smaller banks are limited in competitiveness and might be forced into riskier areas.

The news comes amid plans by mainland China to greatly expand the renminbi market in Hong Kong by allowing foreign direct investment to be settled in the Chinese currency.

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