A surge in business loans to the slowing mainland Chinese economy has prompted Hong Kong regulators to impose strict financial rules four years before they are required under new global standards.
The move is aimed at discouraging banks in Hong Kong from raising money by relying too heavily on short-term funds that can evaporate during periods of tumult. But big global banks have been resisting, over fears that the rules will cut into their profit by driving up loan costs.
While the scale of Hong Kong lending to the mainland is still small compared with domestic lending in China, the rapid buildup has started to concern local regulators and the International Monetary Fund. Their caution stems from problems during the recent global financial crisis, as well as concerns about the current economic environment.
Worries are increasing about a credit squeeze in China. The Federal Reserve, too, is pulling back on its bond-buying program, a stimulus effort that has helped keep short-term interest rates low and has made plentiful capital available for emerging economies like China.
The concern is that some banks in Hong Kong may be overly vulnerable if the Chinese economy stumbles significantly.
Overall lending by Hong Kong banks to mainland China companies and banks increased 32 percent last year, to $465 billion, according to the Hong Kong Monetary Authority, the territory's central bank. Growth in lending accelerated further in January, although it slowed somewhat in the next three months.
The credit analysis firm Fitch Ratings, which looked at a wider range of transactions, particularly trade finance, said on Monday that local and foreign banks in Hong Kong had an even bigger exposure to mainland China, totaling $798 billion. By comparison, banks elsewhere in Asia and the Pacific — mainly Australia, Japan, Macau, Singapore and Taiwan — have lent roughly $400 billion to mainland China, according to Fitch, which used data from the Bank of International Settlements.
"A 'hard landing' for China's economy is a low-probability — but high-impact — downside risk to banks in Hong Kong," Fitch said in a statement.
The Hong Kong Monetary Authority is phasing in new rules for local and international banks that operate here. The regulators have notified 69 banks with briskly growing loan books that they need to increase their long-term sources of funding, like retail deposits. Reducing their reliance on short-term funds would make banks less likely to cut back lending and credit lines if they have trouble borrowing in the international markets.
The authorities also have been admonishing banks to scrutinize borrowers carefully, particularly if their loan books are growing at least 20 percent a year.