Monetary authority pushes back on warning that soaring private-sector debt in HK could lead to recession

23-Oct-2020 Intellasia | South China Morning Post | 6:02 AM Print This Post

Hong Kong’s de facto central bank has dismissed concerns that the city’s sky-high debt in the private sector might lead to a catastrophic meltdown, citing lower actual leverage in the economy and the presence of robust measures to safeguard its banking system.

The high level of private debt in the city was a result of Hong Kong’s status as an international financial centre, where many companies raise money for purposes outside the city, a spokesperson of the Hong Kong Monetary Authority (HKMA) said in a detailed statement on Tuesday night.

This came after international firm BCA Research, prompted by Bank for International Settlements (BIS) data that suggests the private-sector debt at the city’s non-financial companies in the first quarter had soared to its highest level since record-keeping began in 1999, warned of a “cataclysmic recession” if the companies continued leveraging. According to the BIS data, the debt service ratio for the sector a measure of the cost of repaying borrowings also climbed to a record high.

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The HKMA has always focused on banks’ credit risk management and carried out measures including regular on-site and thematic examinations to ensure they conduct lending businesses prudently, the spokesperson said. This, in part, led to a low non-performing loan ratio of just 0.79 per cent at the end of the second quarter.

“To conclude that Hong Kong is vulnerable to macroprudential risk purely based on Hong Kong’s seemingly high private-sector credit is unsound, and overlooks the HKMA’s regulatory policy responses, and the fact that Hong Kong banks are among the top internationally in terms of safety and soundness indicators,” the spokesperson said.

While analysts often cite Hong Kong’s private non-financial sector debt-to-GDP ratio, which was at a record 322 per cent by the first quarter of 2020, the gauge actually tends to overstate the leverage in the economy, according to the statement. This is because credit extended by the city’s banking sector is often used by companies for operations outside the region.

The BIS data that shows HK$10.9 trillion in Hong Kong’s private-sector debt is also an overestimate of the actual amount, as it includes HK$1.8 trillion in credit to the government, according to the HKMA.

In addition, the BIS measure of the debt service ratio is only a hypothetical one and is sensitive to assumptions on interest rates and the maturity of debt, the HKMA said. Given these caveats, the BIS emphasizes that the ratio of each economy is not comparable across economies, it added.


Category: Hong Kong

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