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.
A broad concept 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.
As financial ties between Hong Kong and China have deepened recently, banks’ exposures to non-bank mainland China entities have grown significantly since 2010, the IMF said.
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.
Banks in Hong Kong have taken over lending 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. (Reporting by Saikat Chatterjee; Editing by John Mair)