UPDATE 1-HKMA says mainland-related lending underpinned by genuine demand
* HK bank sector's mainland exposure rose 30 percent in 2013
* HKMA says does not set loan quotas for banks
* HKMA brings forward deadline to review stable funding rule as loans surge (Adds comparative figure on mainland lending for 2012; changes to stable funding rule)
HONG KONG, April 15 (Reuters) - The Hong Kong Monetary Authority (HKMA) said on Tuesday that mainland-related lending in the city's banking sector is supported by genuine economic activities, countering fears about exposure to rising levels of bad debt in China.
The comments came after Hong Kong banks ramped up lending to China in recent years, fueling concerns about their credit exposure to the mainland at a time when sliding economic growth and defaults are making investors nervous.
Some market observers consider that even a modest increase in non-performing loans would have a significant impact on Hong Kong bank profits, suggesting the sector will be a sensitive indicator of China's debt markets in the year ahead.
At the end of last year, the Hong Kong banking sector's total mainland-related customer loans hit HK$2.276 trillion ($293.53 billion), 30 percent more than the HK$1.750 trillion of 2012.
Trade finance loans reached HK$313 billion by the end of 2013, according to the data from the city's de-facto central bank.
"Based on our supervisory work, we are satisfied that mainland-related lending is generally supported by genuine economic activities," Arthur Yuen, deputy chief executive at the HKMA, told reporters.
The HKMA does not set any loan quotas for banks, but banks have to make sure their credit underwriting standards are robust when they expand loan books, Yuen added.
HKMA also said it will review the amount of money it wants banks to keep in reserve based on banks' loan positions at the end of March, rather than June as originally announced.
The change reflects an unexpected surge in lending in January when total loans in the banking sector rocketed up 44.5 percent compared with the same month last year, HKMA said.
Banks are currently required to back up loans with funds from sources deemed by HKMA to be stable, should banks grow their loans faster than the sector average in 2013.
HKMA could lower the current threshold of 20 percent loan growth against stable funding when it reviews the mechanism in March, Yuen said, forcing banks to fund their loan books more conservatively.
Banking sources told Reuters Basis Point in March that the HKMA has asked them to tighten approval processes on syndicated loans for Chinese companies raising offshore loans in Hong Kong. ($1 = 7.7540 Hong Kong Dollars) (Reporting by Michelle Chen and Lawrence White; Editing by James Pomfret and Stephen Coates)
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