UPDATE 1-RLPC-HKMA asks banks to tighten lending to Chinese firms -sources

Fri Mar 28, 2014 4:28am EDT

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(Adds additional quote from HKMA in ninth paragraph)

By Jacqueline Poh

March 28 (RLPC) - The Hong Kong Monetary Authority (HKMA) has asked banks to tighten their approval processes on syndicated loans for Chinese companies raising offshore loans in Hong Kong, banking sources said.

Hong Kong banks' exposure to Chinese companies has soared since mid 2013, after government regulations designed to curb onshore US dollar lending forced Chinese companies offshore to raise foreign currency loans.

Hong Kong loan volume hit a record high of $80 billion in 2013 as a result, 86 percent higher than 2012, according to LPC data.

Nearly 70 percent of this volume was for Chinese companies, which can save around 30 basis points on interest margins by raising dollar loans in Hong Kong, compared to onshore China, according to LPC data.

Syndicated loans issued to Chinese companies in Hong Kong nearly tripled to $56 billion in 2013 from $20.7 billion in 2012.

Nearly half of this volume - $27.6 billion - is for privately-owned Chinese companies. This is nearly three times as much as 2012, when private Chinese firms raised $9.4 billion of offshore loans.

The growth in lending to Chinese private companies is attracting concern after recent defaults on bonds and local renminbi debt.

The HKMA has not issued any specific or official guidelines, but a series of recent conversations with lenders is putting pressure on banks to further improve their processes and controls.

"The HKMA has been closely monitoring the overall credit exposure of the banking sector. The process does not target at any specific sector or jurisdiction, but focuses on distribution of risks to different industries and geographic locations," a HKMA spokesperson said on Thursday.

"The supervisory focus of the HKMA is to ascertain that banks have put in place a sufficiently robust system of controls to manage the specific risks that they are facing. In this regard, we have requested banks to enhance their liquidity management, continuously review their funding sources and loan business plans and to make appropriate judgments when necessary," the spokesperson said.

"In addition, banks should not relax their prudent underwriting standards for loan approval which prove to be effective. These principles apply to all loan types including syndicated loans," the spokesperson added.

Banks already have strict credit approval processes and limited country and industry exposures which eliminates some of the risk of non-performing loans. Lenders are concerned that the HKMA's attention could curb business.

"This pressure from HKMA could drive businesses out of Hong Kong," said a syndicated loans banker.

To avoid adding more Chinese loans into portfolios, banks might try to sell down the syndicated loans to banks in other countries and regions including Southeast Asia and the Middle East in the primary or secondary market. (Editing by Tessa Walsh)

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