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By Michelle Chen
HONG KONG Aug 12 (Reuters) - The risk related to the exposure of Hong Kong banks to mainland China is controllable, the chief executive of the city's central bank said on Tuesday, playing down concerns the territory's ties with the mainland is making its financial system vulnerable.
The growing exposure of Hong Kong banks to the mainland in recent years has raised questions about their ability to handle credit risks against the backdrop of a slowing Chinese economy. Rating agencies and supranational bodies such as the International Monetary Fund have openly voiced concern.
Long praised by investors for their sound risk management, Hong Kong's mid-sized banks are increasingly becoming more exposed to any blow-up in default risk as they hunt for new opportunities in the mainland amid sluggish growth at home. Related story:
"It's not that we don't worry about the risk, but that we think the risk is controllable," Norman Chan, chief executive of the Hong Kong Monetary Authority told reporters.
The exposure of Hong Kong banks' mainland-related lending amounted to HK$2.867 trillion by the end of March 2014, up 10.8 percent from the end of 2013. It constituted a fifth of their total assets, compared with around 5 percent in 2007.
Among these loans, 14 percent was trade finance which the regulator believes has good liquidity and lower risk, 52 percent was for use in mainland China and the rest 34 percent was for use outside of the mainland, the HKMA said on Tuesday.
Chan said the trend for Chinese companies to expand outside of China will continue for a long time and thus there will be buoyant financing needs from these companies.
"For the next five years, Hong Kong will continue to leverage on its relationship with China while facing the world to develop business," Chan said.
Under an extreme scenario presented by the IMF in May, if the default rate in the mainland banking system's interbank obligations hits 80 percent, the losses would wipe out all the capital in the city's banking system.
System-wide, non-performing loans as a percentage of their total loan book remain below 1 percent so far.
The buoyant business opportunities offered by the mainland market was in sharp contrast to the slowing business in Hong Kong.
Chan said the overall loan market growth in Hong Kong is slowing down and feedback from bankers showed that the growth rate in the second half of the year was expected to decline, compared with the first half. (Reporting by Michelle Chen; Editing by Jacqueline Wong)