Fitch Ratings: Headwinds to Foreign Banks' Chinese Lending Rising

(The following statement was released by the rating agency) Link to Fitch Ratings' Report(s): Mainland China Exposure Data File - November 2018 https://www.fitchratings.com/site/re/10050591 Fitch Ratings-Hong Kong/Singapore-November 05: Foreign banks' mainland China exposure (MCE) exceeded USD2 trillion for the first time in 1H18, although its growth slowed from a very strong 2017. Rising headwinds from the US-China trade war and a weaker outlook for the Chinese economy suggest a temporary dip is possible in 2H18 and 2019, but we expect structural factors to drive continued growth in MCE - and its associated risks - over the medium term, Fitch Ratings says. Fitch's calculations show that foreign banks' MCE rose by 2.9% from end-2017 to end-1H18, compared with growth of 18.3% for the whole of 2017, when tight onshore credit conditions encouraged offshore borrowing. We have previously highlighted that rapid growth in MCE might signal rising risk appetite, and this is still a risk despite the slowdown. It was notable, for example, that Hong Kong banks continued to lend strongly to the Chinese private sector. Their overall MCE, which accounts for almost half of foreign banks' MCE, rose by 2.3% in 1H18, while more recent data from the HKMA shows claims on mainland banks fell by 0.5% from end-2017 to end-July. However, their lending to private mainland entities rose by 12.1% in 1H18. Lending constraints at weakly capitalised Chinese banks will continue to provide opportunities for foreign banks to expand on the mainland, particularly in lending to private companies, which have more limited access to domestic bank lending than state-owned enterprises. The breakdown of the Hong Kong data also shows that it was subsidiaries and branches of Chinese banks that pulled back on mainland lending the most. The MCE of Bank of China Hong Kong, for example, fell by 8% in 1H18. In contrast, HSBC, Standard Chartered (LON:STAN) Bank (Hong Kong) and Hang Seng Bank all increased their exposure by 4%-5%, and DBS's branch and subsidiary both raised their exposure by more than 15%, even amid the short-term uncertainties.