HK banks' US$430b exposure to China sparks concern

[HONG KONG] In just a few years, Hong Kong banks have ramped up lending to China from near zero to US$430 billion, fuelling concerns about their credit exposure to the mainland at a time when sliding economic growth and loan defaults are making investors nervous.

Even a modest increase in non-performing loans would have a significant impact on Hong Kong bank profits, suggesting the sector will be a sensitive indicator of China's debt markets in the year ahead. A landmark domestic bond default earlier this month and headlines of bankruptcies - highlighted last week by Zhejiang Xingrun Real Estate Co - have underscored concerns that an unprecedented surge in company debt in China is now showing signs of unravelling.

"The quality of these loans extended by Hong Kong banks to Chinese companies has not been tested," said Mirza Baig, head of foreign exchange and interest rate strategy at BNP Paribas in Singapore. "That is a concern in the backdrop of the rapid rise in exposure."