New disclosures from two of Asia’s largest lenders provide a glimpse of global banks’ rising exposure to China’s fast-growing foreign debt.
HSBC Holdings PLC said in its latest financial report that outstanding loans in China grew 12% in the year ended June 30, to $36.2 billion.
Standard Chartered PLC said in its interim statement for the same period that its overall exposure to Chinese customers rose 30% to $58.3 billion.
Both disclosures offer insight into a recent surge in foreign lending to China as tighter lending conditions there and low global interest rates push more Chinese companies to borrow offshore. According to the latest data from the Bank for International Settlements, outstanding foreign loans to China rose 38% on year in the first quarter of 2014 to a record $795.7 billion, a fourfold increase since 2010.
Of the 25 countries whose banks report lending data to BIS, the biggest surge in new loans in the year ended March 31 — $50 billion — came from banks based in the United Kingdom, a group that includes HSBC and Standard Chartered, both British-domiciled banks with most of their assets in Asia. French banks were the second-largest source of new credit, extending $20.6 billion in new loans to China. Japanese banks were third, raising their exposure by $15.8 billion over the same period.
The rapid growth in credit to China left British banks as China’s largest foreign lenders, with a record $221.2 billion in outstanding loans to China. U.S. banks were second with a record $86.5 billion and Japanese banks third, with a record $77.4 billion.
China’s overall external borrowing remains relatively small and economists say it poses little threat to its economy or financial system. With nearly $4 trillion in foreign-exchange reserves and tight control over flows of money in and out of the country, China’s central bank is in a strong position to offset any sudden retreat of foreign credit, they say.
Still, the rapid increase in borrowing has boosted China’s vulnerability to global capital flows and economists warn that an anticipated rise in global interest rates could lure funds back out of China, raising borrowing costs and pushing heavily indebted borrowers toward default.
The run-up in lending to China by Hong Kong-based banks has prompted the local monetary authority to demand more robust funding requirements. Outstanding loans from Hong Kong-based institutions to China, including units of foreign banks, grew 8% on year in the first quarter to $317 billion, according to the Hong Kong Monetary Authority.
Reconciling all this lending data is impossible since they cover different periods and capture different types of lending. BIS doesn’t break down lending by individual banks, only by nationality. Few banks disclose where they lend, and HSBC and Standard Chartered’s China numbers are not identical measures.
Standard Chartered’s is a more comprehensive measure of its exposure. Standard Chartered said credit to China-based customers account for slightly more than 8% of the bank’s $690.1 billion in total assets, according to its interim financial report. Of that exposure, which includes loans issued to Chinese customers outside China, 74% are less-risky short-term loans that mature in one year or less, mostly trade finance loans or loans to China’s banks.
“We are comfortable on China asset quality; our exposures are predominantly short-dated to the Top 5 Chinese Banks and we have fine-tuned the portfolio following stress testing,” Standard Chartered spokesman Shaun Gamble wrote in an email. “Our exposure is largely to investment grade clients, whom we expect will weather an economic slowdown.”
Still, Standard Chartered said it took a $175 million impairment charge in connection with a commodities fraud scandal in China. The bank last month
began legal proceedings in Hong Kong against the head of a Chinese commodities-trading firm that Western bankers allege illegally pledged the same stocks of commodities multiple times as collateral to get loans. The bank said it had $62 million in commodities-backed loans.
HSBC said its number doesn’t include loans made outside China to Chinese borrowers, only those issued by its branches in China. Those loans represent just over 1% of its $2.75 trillion in global assets. And of that $36.2 billion in loans, $24.3 billion are commercial or trade-related loans. Only $11.7 billion are mortgages or property-related lending.
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