Hong Kong’s proximity to China has long been its stronger selling point. But according to a new Fitch Ratings report, it is having a bad influence on the city’s banking sector.
The rating firm has cut its assessment of the operating environment for Hong Kong’s banks to ‘a’/stable from ‘a+’/negative due to the growing influence of the links between the territory and mainland China. Fitch noted that while being part of China has helped the otherwise mature Hong Kong to grow, it has also exposed the former British colony to weaker corporate governance standards and inflationary risk, especially in the housing sector.
“We believe that Hong Kong’s growing connectivity with China’s economy and financial system creates risks for the robustness, effectiveness and independence of Hong Kong’s regulatory and legal frameworks” wrote Fitch, noting that China’s governance standards, as measured in the World Bank’s Worldwide Governance Indicators, are substantially lower than Hong Kong’s.
They also stated that Hong Kong faced unusually high “macro-prudential risk” as deepening ties with the mainland economy have resulted in above-trend credit growth and high property price inflation. Fitch said it believes Hong Kong is one of three markets globally most vulnerable to macro-prudential risk.
“High property price inflation has increased spill-over risks to Hong Kong’s economy, even though banks’ direct exposure to this sector is small,” wrote Fitch. “Household indebtedness continues to rise, particularly debt for general use, but also mortgages debt, although credit card debt is broadly stable.”
While the Hong Kong Monetary Authority (HKMA) has a strong record of curtailing the impact of loan delinquencies on banks when home prices unexpectedly drop, creating capital buffers and promptly implementing international standards, the HKMA will find it more challenging to maintain “independent and prudent oversight” of banks operating in China, Fitch said.
There has been increasing concern over rising levels of corporate, and now consumer debt in China. As of May 7, a total of 19 domestic corporate bonds have defaulted this year, compared to 49 bond defaults for all of 2017, according to Chinese data provider Wind. The rise in corporate defaults is partly because local governments have stopped offering help to indebted enterprises. The Chinese central government previously warned that local governments are not allowed to provide guarantees for corporate debt.