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Foreign claims on Chinese borrowers below peak

[HONG KONG] Foreign claims on Chinese borrowers have declined over the nine months since they hit an all time peak, driven by a reduction in lending between offshore and mainland banks, the Bank for International Settlements said in its latest report.

Such claims - comprising local claims on Chinese banks' offices abroad as well as cross-border claims of banks' offices globally - declined to US$1.2 trillion at the end-June from a peak of US$1.3 trillion at end-September 2014, according to data compiled by the Swiss-based forum for major central banks in its quarterly report.

While western banks have led the increase in lending to China since the global financial crisis thanks to record-low interest rates in recent years, Asian banks have also emerged as significant lenders.

Despite the small decline, foreign banks' exposure to China remains significant and indicates that many lenders' balance sheets may be vulnerable to a deepening slowdown in the Chinese economy and the growing likelihood of more bankruptcies on the mainland.

While a breakdown on a country-wide basis is not available uniformly, as some countries such as China don't report their international banking statistics to the BIS, banking activities in BIS-reporting cities such as Hong Kong show how quickly some banks have ramped up lending to Chinese borrowers.

The claims of so-called "outside area banks" contracted to US$460 billion at end-June 2015 from US$512 billion at end-September 2014 though some of these claims may be due to intra-group positions, according to the BIS.

In recent years, Hong Kong's banks led by Bank of East Asia have aggressively ramped up their cross-border lending activities thanks to a sluggish domestic economy and drawn by the increasing opportunities offered by the opening up of China's economy.

On a geographic basis, external claims of Hong Kong's banking sector on China accounted for nearly a third of its total claims, according to a September report from the Hong Kong Monetary Authority.

More than half the growth in foreign claims on China over the past few years has taken the form of credit to banks. The outstanding stock of such interbank claims has dropped to US$532 billion at mid-2015 from US$660 billion at mid-2014.

That decline is in sharp contrast to the growing demand for foreign credit from the Chinese non-bank private sector whose outstanding stock has more than quadrupled to US$395 billion at mid-2015 over the past five years, the BIS said.