The Importance of Hong Kong to the PRC as a Global Commercial Banking Center

 

I’ve posted earlier on HK overall position as a global commercial banking center Part 1 here and Part 2 here.

Today I’ll look at the importance to the PRC of HK as a global commercial banking center using 31 December 2019 comparatives.

This will not be a comprehensive analysis but rather a set of data points.

Hopefully sufficient to convince you that HK is very important to the PRC as a source of funding.

If you’re wondering why I have “ignored” capital raising and other services, the answer is that this information is already well covered in the IMF December 2019 Article IV PIN for the HKSAR which covers trade, including re-export from/to China, equity and bond capital raising, etc. Well worth a look.

We’ll be looking at HK’s importance in terms of:

1. Cross-border transactions with the PRC
2. Mainland related non-bank transactions as defined by the HKMA.

Summary

1. Hong Kong is responsible for more than 40% of the cross-border financing provided to the PRC by commercial banks.
2. Its share is 5x that of the second largest cross border financing country.
3. The amount HK provides to the non-banking sector under HKMA’s wider “Mainland” related standard is 3.4x the cross-border financing it provides that sector.
4. Based on the above, HK is a critical source of funding to the PRC.

Sources

The sources for this analysis are the BIS’s Locational Banking Statistics. (LBS) and HKMA’s Monthly Statistical Bulletin.

Technical Notes on BIS LBS

Before getting into the analysis, some comments on LBS statistics.

These are based on reporting by banks in 48 countries. The BIS estimates that the LBS “capture” 94% of total cross-border banking transactions.

LBS reporting is based on residency not nationality or ultimate ownership, both for reporting banks and their customers.

The one exception is BIS Table A4. It is based on nationality of reporting bank resident in one of the BIS LBS 48 reporting countries, irrespective of its location. That means that the claims and liabilities of all "French" banks resident in the LBS 48 reporting countries are aggregated and presented under "France".

Claims and Liabilities on countries (Tables A3, A6.1 and A6.2) are based on LBS reporting country banks” exposures to residents of the named country. 

Using the PRC as an example, LBS reporting banks’ exposure to a PRC entity in say the UK is not reflected in these statistics as PRC exposure. But rather as UK exposure. Exposure to a European company in the PRC is reported as PRC exposure.

Data in the LBS reports is not consolidated. It includes intragroup transactions. These primarily consist of bank intragroup deposit placement and loans.

Now to the analysis.

Hong Kong Has the Dominant Share in the PRC’s Cross-Border Claims and Liabilities

For this exercise, I am using the BIS Table A3-S and BIS Table A6.2 -S as of 31 December 2019.

As per Table A3-S banks in LBS countries—except for those resident in the PRC—had Claims equivalent to USD 944 billion (USD 553 billion for banks and USD 378 billion for non banks) and Liabilities equivalent to USD 779 billion (USD 523 billion for banks and USD 247 billion for non banks) to the PRC.

You’ll notice that in this table roughly USD 13 billion Claims and USD 9 billion in Liabilities are not allocated to either the bank or non-bank sectors.

In Table A6.2-A the BIS has “allocated” these two amounts to the banking sector probably for convenience. You will also notice that the positions of the countries identified do not equal Total Claims and Liabilities.

In any case, these amounts are small enough that they are not going to effect the broad conclusion. 

The following two charts set out the relative position of HK resident banks vis-a-vis the other LBS reporting country banks with significant positions.

As is clear from the above, Hong Kong resident banks dominate cross-border transactions with the PRC with Claims of USD 384 billion and Liabilities of USD 336 billion equivalent.

In terms of Claims, Japan, the second largest country counterparty, has a share one-fifth of HK. 

In terms of Liabilities, the USA, the second largest country counterparty, has a share one-third of HK’s.

HK Resident Banks’ Mainland-Related Non Bank Exposures

In 2013 the HKMA began requiring HK resident banks to report additional details of their total Mainland related non bank business quarterly.

“Non bank” means that exposure to banks is not included.

This report has a wider scope than transactions that qualify for the cross-border Table T031101. It therefore provides a wider measure of the financing HK provides the PRC.

First, it covers not only all HK resident banks but also HK incorporated banks’ subsidiaries and branches located in the Mainland.

Second, it covers a wider range of transactions. For example, if a HK resident bank lends to say Tesla USA for the specific purpose of building a factory in China, that loan is reported here.

Details of these requirements can be found in the January 2018 revision to the original 2013 Circular. If you read this you’ll see just how “wide” HKMA’s “Mainland related” definition is.

The HKMA publishes some of the data from these reports as part of its Monthly Statistical Bulletin Section 3.13 “Mainland-Related Lending and Other Non-Bank Exposures”.

With this data we can get a wider view of HK’s role in providing finance to the PRC as well as the importance of that role.

First, let’s look at total Mainland-Related lending as per HKMA’s T031301.

The first thing you’ll notice is that Mainland-Related Non-Bank Lending is some 3.4 x Cross Border Claims on the PRC Non-Banking Sector as reported in T031101.

Looking over that report you’ll also notice that the relative percent of Loans (ex Trade Finance) and Trade Finance have remained relatively constant over the 25 quarters since statistics were first published for 31 December 2013.

The averages for that period are respectively 91% and 9%. No significant difference from the 31 December 2019 shares.

Over that period, total lending has grown from HKD 2.6 trillion to HKD 4.6 trillion.

To find out which type of banks resident in HK are providing the funds, we turn to T031302.

“Local Banks” include the HK offices and Mainland Branches of banks incorporated in HK.

“Mainland Subs” are HK incorporated banks’ subsidiaries in the PRC.

“Foreign Banks” are all other resident banks in HK. For example, the HK branches of PRC banks, of European banks, etc.

The 31 December 2019 percentage shares are fairly consistent with the average shares over the 25 quarters since December 2013: 43%, 41%, and 16% respectively.

What this suggests is that there is fairly wide appetite for PRC risk. It’s not just locally incorporated HK banks and the HK branches of PRC banks that are providing financing.

Who are the borrowers? Table T031303 provides the answer.

The "Non-Mainland Entities" include foreign firms who have borrowed for a project in the PRC.  So if Tesla USA was the borrower on a loan to build a plant in the PRC, it would be included here.

Again the 31 December 2019 percentage shares are close to the averages over the 25 quarters since December 2013: 42%, 23% and 34% respectively.

There’s a good mix of business here with some 60% of lending outside of the SOE sector.

Finally, T031304 provides data on other non-bank exposure to the Mainland.

Negotiable Debt Instruments are non loan debt obligations. Think bonds, etc.

NDI purchases take the funds provided to USD 694 billion or 4x the cross-border financing provided by HK resident banks to the PRC non-bank sector.

Off Balance Sheet Exposure includes issued but undrawn letters of credit and guarantees issued on behalf of customers, irrevocable commitments to lend.

From the foregoing, it’s clear that HK plays the dominant and critical role in providing financing for the PRC.

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.