Hong Kong growth outlook remains cautious as debt levels keep on increasing, raising concerns over the banks’ asset quality. The country’s debt levels have surged to mounting highs, reaching one of the highest in Asia.
Hong Kong’s private non-financial sector credit was 285 percent of GDP at the end of 2015’s third quarter, compared to 149 percent in G20 economies and 168 pct in Japan. Further, the growth of mainland-related lending slowed to 3.2 percent y/y in 2015, compared to 23.1 percent in 2014. The slowdown was faster than the total loan growth, which fell 3.8 percent from 10.9 percent in 2014.
The slowdown in mainland exposures could be due to weaker demand, driven by falling onshore financing costs, improved liquidity conditions, as well as dampened trade financing needs. However, banks have scaled back mainland exposures owing to China’s slower growth.
The country’s trade finance accounted for 8.3 percent of mainland-related lending as of end-2015, down from 11.0 percent at end-2014. Moreover, the stock of current outstanding loans is the biggest concern amid sluggish outlook for growth in mainland-related lending, DBS reported.
In terms of banks mortgage loans, risks remain on the upside marginally. Newly drawn-down mortgages are priced as low as 1.8 percent to 1.9 percent despite the spike in HIBOR in early 2016. The mortgage-to-income ratio dropped below 50 in January 16 for the first time in a year.
“As long as US rate hikes rise gradually, housing affordability and mortgage delinquencies, currently at 0.04 percent are likely to remain stable,” DBS said in a research note.
Meanwhile, risks to mainland loans have risen due to three major reasons. First, slowdown in China has eroded debt-servicing facilities. Secondly, restructuring and merger actions, aimed at reducing overcapacity, raise issues of uncertainties. Finally, exposure to property raises risks if the market corrects itself.
Looking further ahead in the next one to two years, the household debt-to-GDP ratio is likely to be capped below 70 percent. In 1Q16, new mortgage loans fell by 42.6 percent y/y and 48.6 percent respectively. Risks are likely to rise from slower domestic growth and from the US interest rate normalization over the coming 18-24 months.
The material has been provided by InstaForex Company – www.instaforex.com