As pointed out here months ago, the monetary tightening of China has made credit difficult to come by.
Some companies, as pointed out repeatedly recently amid increasing concerns, have had to borrow from the shadow banking system.
Meanwhile, other companies which have access to Hong Kong banking system have been borrowing from banks in Hong Kong as credits are much cheaper here (from the perspective of Hong Kong banks, lending to Chinese companies are more profitable than, say mortgage lending in Hong Kong), leading to the unintentional tightening of credit in Hong Kong, as I have pointed out long time ago.
As a result of that, Hong Kong banks exposure to China has surged very dramatic in the past year and half. In fact, according to Bloomberg Brief’s Michael McDonough, Hong Kong banks exposure to the Mainland China is now larger than the size of Hong Kong economy.
What I am not sure is to what extent should I be worried about that, particularly as hard landing at some point in the future is my base case scenario with regard to China.
The good thing is that 83% of the exposure to China are claims on Chinese banks according to Michael McDonough, which are largely state-owned and will likely be backstopped by the government in the event of crisis, so I am not sure if I should be very much worried by this.
That said, this isn’t a good thing to see banks that exposed to an economy which is actually in trouble, even though the exposure still looks very safe for the time being.
This article originally appeared here: Hong Kong Banks Exposure To China Is Larger Than The Size Of HK Economy
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