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.
"What we have been telling the banks all along is that when you expand your loan book at that sort of rate of growth, make sure of your credit" assessment practices, Arthur Yuen, the deputy chief executive for banking regulation at the Hong Kong Monetary Authority, said in an interview.
Western and Japanese banks have been grumbling to the monetary authority. And a coalition of some of the world's largest banks, the Asia Pacific Loan Market Association, is starting to become vocal on the issue, notably on the funding requirements. Banks "are concerned that this restricts the growth of the loan business in Hong Kong," the group said in a statement.
Global banks have led the lending expansion, although with a few exceptions they have few or no deposits from Hong Kong residents. Those so-called wholesale banks say the new rules favor the banks with large bases of deposits here, including HSBC, Standard Chartered and Citigroup.
The wholesale banks tend to borrow money a day or a week at a time at what are now extremely low interest rates in global capital markets.
The Hong Kong rules are aimed at matching new global regulations created in response to the financial crisis. The global rules, under the so-called Basel III accord, call for stable funding requirements, which push banks to rely less on short-term funding for long-term liabilities like loans.
But those rules are still being completed and don't take effect until 2018. Hong Kong is moving more quickly, with banks being measured on funding as of March 31.
The swift response comes after Hong Kong's experience in the financial crisis. While banks with large deposit bases in Hong Kong continued lending, wholesale banks reduced or cut off lines of credit for thousands of businesses here. That situation set off a wave of bankruptcies, even among export companies that had orders but suddenly lacked the cash to buy goods and ship them.
One of the senior policy makers who tried to address the problems at the time, Norman Chan, became the chief executive of the Hong Kong Monetary Authority in late 2009, a job he still holds. He has strongly backed the stable funding requirement.
I.M.F. officials have been supportive, too. "We would judge that as a prudent measure," said Allison Holland, the deputy chief of the I.M.F.'s monetary and capital markets department.
The I.M.F. has scrutinized the buildup of mainland Chinese lending by financial institutions in Hong Kong in two reports in the last two months.
The reports called for the monetary authority to further increase its monitoring of mainland lending. But the I.M.F. concluded that the loans did not pose a systemic risk to the Hong Kong banking system except under extreme circumstances, such as if Beijing authorities allowed the mainland interbank market to collapse almost completely.
More from The New York Times:
For now, the loans are largely going to large companies with significant resources and backing, one reason the authorities haven't hit the panic button.
Half of the mainland loans were to large state-owned enterprises, often to finance overseas expansion, with no single state-owned enterprise accounting for more than 1 percent.
Nearly a third of the loans were to the mainland operations of multinationals, often extended by banks from the same country; the Hong Kong offices of Australian banks, for example, have been particularly active in lending to the mainland subsidiaries of Australian multinationals.
And the remaining 19 percent were to various mainland companies, usually with repayment guarantees from mainland banks or with real estate as collateral.
Despite the diversity in borrowers, "it's still important for the authorities to remain vigilant," Ms. Holland said.
Banks have been wary of saying anything publicly about the rules that might be construed as criticizing their regulator. Bank of America, JPMorgan Chase and Citigroup declined to comment on the new rules. Goldman Sachs is not affected because it does not have a banking license in Hong Kong and is regulated by the city's Securities and Futures Commission.
One lingering question is why Hong Kong has quickly become a more attractive place to borrow. Lower interest rates help; a company can typically borrow money in Hong Kong for 2 percentage points less than in mainland China, said Sonny Hsu, the senior analyst for Hong Kong banks at Moody's.
Some experts see China's international borrowing as an early warning sign of a troubled domestic banking sector that devotes increasingly more credit to companies and projects that will never be able to repay them in full.
Other economists, as well as Hong Kong regulators and bankers, are skeptical that Chinese companies are borrowing in Hong Kong because they can no longer raise money at home.
They point out that much of the borrowing is in United States dollars, not renminbi, as many Chinese companies have stepped up overseas acquisitions; mainland Chinese banks have limited supplies of dollars to lend because the central bank relentlessly buys dollars instead to prevent the renminbi from appreciating in currency markets.
And there are few signs that a credit squeeze has become critical in China. Companies' accounts receivable, for example, are rising no faster than sales.
"I still do not see major systemic stress," said Louis Kuijs, the China economist in the Hong Kong office of the Royal Bank of Scotland.
Yet as loans to China continue to grow, Hong Kong regulators have been actively reminding banks of the 1998 collapse of the Guangdong International Trust and Investment Corporation. That state-owned enterprise failed during the Asian financial crisis with $4 billion in debts, much of it borrowed in Hong Kong.