Tag Archives: Hong Kong

The Impact of China’s Slowdown on Hong Kong

China’s economy is slowing down, as its GDP grew at 7.4% in the first quarter this year, a level below the 7.7% growth last year and the double-digit growth many years ago.

Relatively, many people are concerned about the prosperity of Hong Kong, whose economy is heavily tied to China through trade, tourism, foreign direct investment, and financial channels. In my observation, there are two main risks for Hong Kong—export growth and credit quality.

China’s growth momentum has long been exports and government-led investment projects. Meanwhile, the country as the world’s second largest economy is also a significant importer due to its huge domestic market of 1.35 billion people. Therefore, many Asian economies, including Singapore, Taiwan, South Korea, and Vietnam, have heavy export exposure to China. In particular, Hong Kong appears to among the most exposed with almost 30% of its exports to China. Since domestic consumption is weakening on the overall economic slowdown and potential risk of a housing bubble, Hong Kong’s exports are highly likely to slide, dragging down the special region’s GDP growth.

Besides, surging loans to Chinese borrowers by banks in Hong Kong triggered concerns on the city’s financial stability. It is due to tight credit in China and lower interest rates in Hong Kong that lending to mainland businesses by all authorized institutions has increased from about 5% of total banking sector assets in 2007 to nearly 20% today, according to the Hong Kong Monetary Authority. As a result, total mainland-related exposure amounts to 165% of Hong Kong GDP, despite that 43% of the outstanding loans come from foreign banks operating in Hong Kong, rendering a comparison to the city’s GDP less relevant.

The worry is that the booming lending might increase uncertainties in Hong Kong’s banking sector and result in overwhelming integration with the Chinese economy. There are signals of credit quality deterioration in China, as the non-performing ratio of Chinese banks rose to 1% at the end of the fourth quarter from 0.97% at the end of the third quarter last year, which is the highest since the end of 2011. Many loans were made on the expectation of higher growth rate and the slowdown could lead to serious default issues.

In response to the higher risk of cross-border leverage, the HKMA decided to regularly conduct on-site examinations of banks’ credit-underwriting processes, as well as regular stress tests to assess banks’ resilience to credit shocks. Specifically, it said it has written to banks that have posted higher-than-average increases in total lending and asked them to make sure they have enough “stable” funds.

The Inception of Cross-Market Stock Investment in China and Hong Kong

The new-established administration in China is ambitious to progress structure reform for sustainable growth. With the claim that the market force will be allowed to play a fundamental role in the overall economy, a key task on the to-do list is the opening-up of its strictly controlled capital markets.

Recently, the country made a big move by initiating the so-called Shanghai-Hong Kong Stock Connect, a pilot program of cross-market stock investment. It allows mainland investors to trade shares of select companies listed in Hong Kong, while permitting Hong Kong investors to trade designated stocks trading in Shanghai. More specifically, investors in Hong Kong can plow up to 13 billion yuan ($2.1 billion) a day into mainland shares, with a maximum of 300 billion yuan. Mainland investors can send up to 10.5 billion yuan a day to Hong Kong, capped at 250 billion yuan. Purchases will be limited to dual-listed stocks and designated blue-chips, and mainland participants will initially have to be either institutional investors or retail investors with 500,000 yuan ($80,650) in securities and cash.

The inception of the program significantly boosted the two markets, with the Shanghai Composite Index ending the day up 1.4%, the biggest gain in the region, and Hang Sang Index (Hong Kong) climbing 1.5% to its highest close since Jan. 2. Both markets are rebounding after sharp falls in the first quarter on concerns of China’s economic slowdown.

Definitely, the cross-border integration will be a mutually beneficial cooperation for both China and Hong Kong.

On the side of China, the Shanghai market has been long-depressed shown by the negative year-to-date performance of the Shanghai Composite. The program will inject vigor into the bear market by introducing foreign capital. In particular, since shares of companies dual-listed in Shanghai and Hong Kong are usually cheaper in Shanghai, mainland investment will be appealing to global investors who can easily trade those dual listed companies in Hong Kong.

On the side of Hong Kong, Hong Kong Exchanges and Clearing Ltd (HKEx) has been struggling to lift trading volume and further capitalize on China’s growing opportunities, despite that the market has comparative advantage of mature accounting practices and transparent regulations. As mainland investors are set to invest in iconic Chinese companies listed in Hong Kong such as Lenovo and Tencent, Hong Kong’s role as the primary gateway to China will be strengthened along with increasing market confidence.

In the long run, the move is expected to push forward the internationalization of the Chinese yuan and bolster Hong Kong’s position as an offshore yuan center by integrating capital domestically and internationally.