By Saikat Chatterjee
HONG KONG, April 9 (Reuters) - Hong Kong banks' rising exposure to mainland China requires close monitoring and cooperation with Chinese supervisors, but stress tests show they are well positioned to absorb potential losses, the International Monetary Fund said on Wednesday.
As financial ties between Hong Kong and China have deepened, banks' exposure to non-bank mainland China entities have grown significantly since 2010, the IMF said.
A broad measure of banks' exposure to non-bank mainland China entities (NBMCE) has risen to 19 percent of total assets, the IMF said in a review of the HK economy. This was in the low single digits in 2007, according to Hong Kong Monetary Authority data.
The NBMCE is used by the HKMA, the city's de-facto central bank, to track loans by the territory's banks to entities in mainland China.
NBMCE includes exposure to resident mainland affiliates for use outside of Hong Kong, lending of Hong Kong bank subsidiaries in the mainland, and borrowing by foreign companies for use in the mainland.
The IMF said Hong Kong's banking system was "well positioned" to absorb losses in adverse scenarios, such as lower growth in China and Hong Kong, higher U.S. interest rates and asset price shocks.
The IMF expects Hong Kong's economy to grow 3.75 percent in 2014, up from 2.9 percent in 2013 due to a recovering global economy. It said the main domestic risk for the city was a disorderly correction in property prices.
Banks in Hong Kong have taken over lending to China that foreign banks once dominated, drawn by cheap funding rates following the global financial crisis, a voracious appetite from Chinese borrowers and healthy growth in the world's second-biggest economy.
Hopes of that rapid growth have enticed regional and Chinese lenders to buy their way into a slice of the action.
Last week, Oversea-Chinese Banking Corp Ltd offered to pay almost $5 billion for one of Hong Kong's last remaining family-owned banks, Wing Hang Bank Ltd.
Yue Xiu Group, the trading arm of China's Guangzhou city government, paid a multiple of 2.08 times to buy Hong Kong's Chong Hing Bank last year. (Reporting by Saikat Chatterjee; Editing by John Mair)