Hong Kong as a Global Commercial Banking Center - Part 1

 

This is the first of two posts on this topc. The second post is here. 

Given recent developments in the HKSAR and international reactions thereto, I thought it would be useful to take a look at the HKSAR’s role as a global commercial banking center.

Today I’ll explore the cross border positions of financial institutions resident in Hong Kong using data based on location not nationality.

The goal of this exercise is to see

1. Where HK ranks as a global center.
2. Whether it is a net provider or taker of cross-border funds.
3. Which countries have significant positions vis-a-vis the HKSAR

Summary of Results

1. As of 31 December 2019, HK ranks sixth in the world in terms of the gross provision of cross-border funds to the rest of the world with USD 1,590 billion in cross-border Claims.
2. As a net provider of funds, it ranks third with USD 360 billion.
3. After adjusting for transactions with the PRC—which is treated as a separate entity—HK’s rankings do not change.
4. Residents of the USA have received the largest share of HK’s net cross-border funding--USD 94 billion. 81% of which was to the US non-bank sector. 

Before I get into the analysis, some introductory discussion on sources and their limitations.

Sources

For this post, I’ve relied on two primary sources:

1. The Hong Kong Monetary Authority’s (HKMA) statistical report Table 3.11.1 (aka “T031101”) as of 31 December 2019. Follow this link, open the ZIP file, and locate the 2019 data file. If you’re interested you can browse other HKMA reports here. There is a wealth of information here.
2. The Bank for International Settlements (BIS) Locational Banking Statistics also for 31 December 2019 Table A2-S.

Analytic Focus: Commercial Banks’ Cross-Border Balance Sheets

This analysis focuses on commercial banks’ cross-border financial positions on a balance sheet basis. Stocks not flows of funds.

This post doesn’t explore those banks’ role in the provision of other commercial bank services, e.g., trade financing (letters of credit), foreign exchange and other trading, or payment processing.

Nor does it examine cross border investment banking activities, e.g., capital raising via bond and equity underwriting and placement. 

Or consider the role of the HK’s financial markets in capital allocation.

Technical Notes on Data Sources

First, the data in both sources is based on “residency” not ultimate nationality of both the reporting banks and their customers.

What does that mean?

It means that the cross-border position of every financial institution in Hong Kong regardless of its ownership or country is included in the data.

In addition to locally owned HK banks, branches of French, German, UK or USA banks in HK are included. As are foreign owned banks incorporated in Hong Kong, e.g., Hong Kong Shanghai Bank, Bank of China Hong Kong, etc.

Similarly those banks report their cross-border positions (Claims and Liabilities) based on the location/residency of their customers.

Claims on or Liabilities to a French owned company in the PRC are reported as PRC not French exposure. Similar exposure to a PRC bank in the UK are reported as UK not PRC Exposure.

This data set is ideal because we want to analyze Hong Kong as a global commercial banking center. 

That is, its ability to mobilize (attract) funds from around the globe and then intermediate them also around the globe.

Third, the data is unconsolidated.

Intragroup transactions are not netted or consolidated.

If BNP Frankfurt places funds with BNP Hong Kong, it shows up as a “German” deposit (a liability). 

If BNP Hong Kong places a deposit with BNP USA, it shows up as a “claim” on a USA entity. 

In consolidated statistics these intragroup transactions would not appear.

Again unconsolidated data are ideal for our purposes because we want to measure the stocks resulting from the actual flow of funds. 

Think of the LBS and HKMA data as reflecting balance of payment flows as opposed to consolidated data which are credit risk focused. We want to see cross-border flows of funds.

Third, BIS Table A2-S provides information that allows us to rank the HKSAR’s position in relation to 47 other “countries”.

The 48 countries comprise the major countries and financial centers in the world. According to the BIS’s estimates, LBS data “captures” 94% of unconsolidatd cross border positions in the world.

Fourth, the HKMA report provides detail on Claims and Liabilities on a country by country basis.

No other source that I am aware of has this level of detail in one place.

This allows us to see how widespread the “reach” of HK resident banks is. And where the largest cross-border positions are.

ANALYSIS

Hong Kong’s Ranking Among Global Financial Centers

Let’s begin by placing the HKSAR within the major financial centers of the world using data in the BIS Table A-2S.

The above chart “captures” roughly 67% of Claims and Liabilities and 76% of the Net Positions of the 48 countries identified in Table A2-S. Note that not all the entities named here are separate nation states.

With US$ 1,590 billion in Gross Cross-Border Claims HK ranks in 6^th place right below Germany.

When one considers the size of HK’s economy relative to the other countries listed here, its position is quite remarkable.

But there is even more.

Hong Kong provides net cross-border funding of US$ 360 billion. On that basis it’s in 3^rd place.

However, let’s make make a “small” adjustment.

Because the HKSAR has its own currency, it treats the PRC as a “separate” entity.

In order to look at the HKSAR’s cross-border position re all nations, except the PRC, we need to remove these amounts.

If you’ve followed the HKMA at all, you will know that it has kept not only a close eye on extensions of credit to the Mainland but has also controlled these. So we’d expect to see a rough balance.

As per HKMA Table T031101, Claims against the PRC were some USD 384 billion versus USD 336 billion in Liabilities.

That reduces the Gross Claims to USD 1,206 billion and net funding provided to the world ex PRC to USD 312 billion. 

But it does not change HK’s overall rankings.

We can make another adjustment—this one much cruder—to see how dependent HK is on bank intra-group transactions.

If we remove USD 548 billion from Claims and USD 599 billion from Liabilities using the data in BIS Table A2-3, the adjusted net cross-border position is USD 441 billion.

By all three of these measures the HKSAR is a net provider of cross border funds.

Where did the “excess” cross-border funds (Claims-Liabilities)come from?

Funds raised locally and the equity of the locally incorporated banks. Foreign bank branches are almost certainly operating with only “notional” equity capital in HK. 

In a second post we will look at HK in detail on the recipients of HK's cross-border funding.

Hong Kong as a Global Commercial Banking Center - Part 2

 

Hong Kong’s Position vis-a-vis Regional Counterparties

Part 1 of this two part post here. 

Now let’s use the HKMA data to look in more detail at net cross-border positions.

First, let’s look at the net border positions by regions.

A positive number means that HK resident banks have provided net funding to residents of the region. A negative number means that the “region” has provided net funding to HK resident banks.

As disclosed in the HKMA table, HK has cross-border relationships with 111 identified countries and entities. Countries with smaller amounts are not individually identified but aggregated into “other” categories. This is a pretty broad reach.

As might be expected, roughly two-thirds of HKSAR’s aggregate cross-border position is to Developing Countries. No surprise. Banks go where the business opportunities are.

This chart does not tell the full story.

Within each region some “countries” have net positive positions and others have net negative positions.

Hong Kong’s Position vis-a-vis “Countries”

Let’s go a bit deeper and take a look at the positive net positions by residents of countries.PPNote that word “residents”. It means any entity or individual in a country irrespective of nationality.

The above chart looks at those “countries” who have benefited from extensions of credit.

The percent column shows the percent of the USD 360 billion received by residents of each country.

Note this adds to more than 100% because there are some countries whose residents are net providers of funds to HK resident banks.

The largest of these are residents of Spain (USD 9 Billion), Russia (USD 10 billion) the Netherlands (USD 12 billion), Macao SAR (USD 12 billion) and Taiwan (USD 24 billion). 

The sector column shows whether the banking or non-banking sector received the majority of the amount.

Just 8 “countries” account for almost all the USD 360 billion.

As is clear from the above data, residents of the USA received the largest share-- some USD 94 billion or 26% of the USD 360 billion the HK provided the rest of the world.

Note that is approximately twice the net amount provided to the PRC.

If we assume that in general interbank lending is for liquidity management purposes (deposit placement) and that non financial sector lending is generally for capital expenditure or working capital, then the economic benefit of the latter should generally be greater.

The USA non-bank sector received 81% of USD 94 billion.

Compare that to the PRC where roughly 91% of the net amount was to the bank sector.

Let’s look at Gross Claims.

The chart above shows the five largest gross cross-border Claims on the non-bank sector by foreign currencies only and the second, including the HK$.

These “countries” represent more than 60% of the total gross cross-border Claims on the non-bank sector by HK resident banks.

On this basis, the PRC is first. Note that 30% of the PRC’s total consists of HK$ denominated lending.

When you compare these amounts to the net positions, it’s clear that there are significant deposits from PRC entities in the HKSAR. And more lower deposits from residents of the USA.

Are these amounts economically significant in the overall domestic financing of either country?

On an aggregate basis, not really. But note that caveat.

According to the US Federal Reserve, US banks’ Commercial and Industrial loans totaled USD 2, 345 billion as of 31 December 2019.

According to the PBOC, PRC financial institutions had extended foreign currency loans to the non-financial and government department sector equivalent to USD 13,684 billion as of year end 2019. 

But there is a bit of a caveat on the “not really”.

If the lending provided in the USA or in the PRC is targeted to foreign companies that have limited access to domestic bank financing, it could be a critical source of funding.

Beyond that HK provides funding—albeit smaller amounts—to developing countries in Africa and Asia that are no doubt more critical to those nations. 

And as well HK is a congenial venue for funds placement for a variety of countries. It should be noted that PRC residents have placed roughly 24% of aggregate bank and non-bank deposits in HK.

In summary HK plays a major role among global commercial banking centers. Punching well above its weight compared to major countries.

Whether HK will be able to maintain this position isn’t clear at this point.