Slowing growth in China’s massive economy has raised concerns that the rest of Asia would suffer if China continues to lose momentum.
Rapid growth in lending to the mainland would seem to put Hong Kong at particular risk in case China’s economy experiences a “hard landing.”
Of course, few analysts expect Chinese growth to slow sharply:. More likely is a gradual deceleration, after data Wednesday showed China’s gross domestic product growth slowed to 7.4% in the first quarter of the year, from 7.7% in the final quarter of 2014.
Most analyses have focused on how slower Chinese growth would impact Asia through the trade channel. Even by that metric, Hong Kong – which sends 28.1% of its exports to China – would appear to be among the most exposed.
Other economies with heavy export exposure to China include Singapore, Taiwan, South Korea and Vietnam, according to a recent report from Capital Economics.
But the greatest risk for Hong Kong would appear to be through the financial channel: Lending to mainland businesses by all authorized institutions (“AIs” in the attached chart) has surged from about 5% of Hong Kong’s GDP in 2007 to nearly 20% today, according to the Hong Kong Monetary Authority.
“Given the size of Hong Kong’s economy relative to the mainland and how much it’s lending to the mainland, it does look quite worrying,” Capital Economics analyst Julian Evans-Pritchard told The Wall Street Journal. “It has become quite a large percentage of Hong Kong GDP.”
In its latest Monetary and Financial Stability Report, issued last month, the HKMA called banks’ rising exposure to the mainland “a key risk factor to watch for.”
But they don’t see an imminent danger. Just ahead of this week China GDP release, Arthur Yuen, the HKMA’s deputy chief executive officer, called a news conference to say the authority was on top of any risks from mainland loans.
“Despite the absence of any early signal of credit quality deterioration, the HKMA will continue to closely monitor banks’ asset quality and ensure banks are resilient to credit loss throughout the economic cycle by maintaining strong capital positions and, where necessary and appropriate, regulatory reserves,” Mr. Yuen said in a statement.
John Zhu, an economist at HSBC in Hong Kong, said the real danger would come if China’s real-estate market suddenly collapsed – perhaps due to a combination of falling prices and a supply glut.
Given the fact that so much of Chinese citizens’ wealth is tied up in real estate, a pricking of the real-estate bubble could set in motion a rapid downward spiral for consumption, investment and overall growth.
Still, Mr. Zhu agreed with the HKMA that there’s no immediate risk to Hong Kong’s economy.
“On the whole I think the risks are there, but probably contained for now,” he said.