The recent pace of credit growth in Hong Kong has increased the risk of banks making bad loans and is contributing to the rise in funding pressures at a time when a recession is a very real possibility, says the International Monetary Fund (IMF).
According to a report released today (November 16) on the IMF’s website, credit growth in Hong Kong has been surging at an extraordinary pace, particularly for loans in foreign currency. The rise in lending is also creating “strains” on bank funding.
“This is not surprising given the very low costs of Hong Kong and US dollar financing, the high levels of liquidity in local banks and the strong demand for credit, particularly from companies with operations in the mainland,” said the report.
The loan-to-deposit ratio of non-renminbi foreign currency has risen 63%, an increase of 20% from a year ago, said the report. Though the figure is relatively low by international standards, the potential for an “upswing” should not be ignored, warned the IMF.
The US Federal Reserve has pledged to keep borrowing costs at near zero through at least mid-2013 and credit tightening in the mainland has spurred loan demand from Chinese companies in Hong Kong. The danger is that some of these loans sour as export-orientated companies struggle on the back of falling demand from an ailing Europe.
Those conditions could also cause a temporary recession in Hong Kong, exacerbating the problem.Hong Kong chief executive Donald Tsang has warned last week that there’s a 50% 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 roil markets.