Fitch Sounds Warning on Hong Kong Banks, Citing China Risks

(Bloomberg) -- Fitch Ratings Ltd. cut its assessment of Hong Kong banks’ operating environment due to the territory’s tighter links to the mainland economy.

“We believe that Hong Kong’s growing connectivity with China’s economy and financial system creates risks,” Fitch said in a statement Thursday on its website, adding that China’s governance standards, as measured in the World Bank’s indicators, are substantially lower than Hong Kong’s.

The ratings company said it also took into account risks in Hong Kong due to above-trend credit growth and high property price inflation, largely the result of the deepening linkages with China. It cut the assessment for Hong Kong banks to ‘a’ with a stable trend, from ‘a+’ negative.

The Hong Kong Monetary Authority has a strong record of curtailing the impact of loan delinquencies on its banks when home prices unexpectedly drop, while the regulator is unlikely to set limits or additional buffers explicitly for China-related risks in the near term, according to Fitch.

“It is more challenging for the HKMA to maintain independent and prudent oversight of banks’ China expansion as it relies on coordination with the authorities on the mainland to ensure banks’ activities there are well-managed and well-capitalized,” Fitch said.

Fitch’s operating environment assessments are different from its ratings, and take into account other factors such as the economic environment, how developed the financial market is, and the regulatory and legal framework.

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