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Hong Kong Credit Growth Risks Bad Loans Amid EU Crisis, IMF Says

November 16, 2011

Nov. 16 (Bloomberg) -- Hong Kong’s “rapid” credit growth has increased the risk that banks make bad loans as the city faces a potential recession if the European crisis deepens, the International Monetary Fund said.

“Credit has been growing at an extraordinary pace, particularly for loans in foreign currency,” the IMF said in a report released today. Such growth may “lead to a worsening of average credit quality” and create “strains on bank funding,” it said.

The U.S. Fed’s pledge to keep borrowing costs at near zero through at least mid-2013 and credit tightening in China have spurred loan demand from Chinese companies in Hong Kong, where a currency peg means the city’s interest rates track those in the U.S. Chief Executive Donald Tsang warned last week that there’s a 50 percent chance the global economy will shrink next year and Hong Kong may see “a couple of quarters of bad times” as Europe’s debt crisis roiled markets.

While the development of offshore yuan business is “positive” for the city, growing deposits in the Chinese currency may intensify competition for deposits in other currencies that result in higher funding costs, the IMF said. China needs to raise the convertibility of its capital account to encourage yuan repatriation as the offshore market continues to grow, it said.

Raising Rates

As Hong Kong-dollar loans rose with contracted deposits, the loan-to-deposit ratio in the local currency increased to 87 percent by the end of September from 78 percent a year earlier, Hong Kong Monetary Authority data released on Oct. 31 showed. There is scope for the city’s banks to further raise interest rates on demand for loans, Norman Chan, head of the HKMA said Nov. 4.

The city’s de facto central bank asked lenders in April to reassess their funding plans amid concerns that “unsustainable” credit growth will curb liquidity and cut loan quality. The rising liquidity strain may hurt bank asset quality and limit earnings growth, China International Capital Corporation Ltd. said in a report this month.

The IMF expects Hong Kong’s economy will slow to 4 percent in 2012, down from 5.75 percent this year, on weaker export demand. Should the European crisis worsen and bring a “sudden downside shock” that cuts global growth by 3 percentage points, the city will fall into recession, the fund said.

The city government should prepare to adopt immediate fiscal stimulus, it said.

Inflation Risk

Besides weakness in global trade, Hong Kong is grappling with elevated inflation and the risk of a slumping housing market. Consumer-price growth will ease to a range of 4 percent to 5 percent next year on slowdown in global economy and food price gains imported from China, the IMF said.

Residential property prices slid to the lowest in more than six months last week as the threat of recession continues to dent buyer sentiment, after home prices surged to about 70 percent since the start of 2009 on low mortgage rates and an influx of Chinese buyers. Financial Secretary John Tsang said Oct. 27 he sees “downside” risk in the home market on the chance of a global economic slowdown.

There are signs that the city’s property market may cool, while it’s still early to determine if such a slowdown will persist, the IMF said. The government’s reintroduction of a government-subsidized home plan is appropriate to lessen the social burden on renters and new households that do not yet own a home, according to the report.

Rising property and inflation have led to criticism of the city’s linked exchange rate system, which Hong Kong has maintained since 1983. Proposals to change the peg are “ill- conceived” as that would sacrifice the city’s monetary and financial stability, the IMF said.

--Editor: Patrick Harrington, Ken Mccallum.

To contact the reporter on this story: Sophie Leung in Hong Kong at

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at

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