Spiraling Interest Rates in China’s Shadow Market and Hong Kong’s Suddenly Shaky Banking System

June 1, 2011

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Hong Kong Monetary Authority (HKMA) chief Norman Chan, is concerned that hot money inflows equivalent to 680 billion Hong Kong dollars ($87.4 billion) that has poured into Hong Kong since 2008 could reverse as U.S. interest rates rise.

Expect loan-to-deposit ratios to become stretched, and interbank rates to spike, as they have started to with SHIBOR rates hitting 5% last week. 

Although not stated in public, there has to concern over lending to mainland Chinese as Hong Kong banks that may be “unwittingly acting as lender of last resort to Chinese companies.”

“Lending by Hong Kong banks surged 30% in the first three months of this year. If last year’s figures are anything to go by, much of this lending is going to mainland companies which saw loans grow 44% in 2010 to $440 billion.

Nomura reported that Interest rates are spiraling in the “kerb,” or shadow banking market. “According to the Wenzhou branch of the People’s Bank of China, the average informal lending rate grew to 24.3% in April, compared to 17.2% last August.” Further, the China Daily reported that 89% of the population of Wenzhou — a city in Zhejiang province — and 57% of its enterprises borrowed outside the official banking system last year.

source : marketwatch

HistorySquared

How on earth are 24% interest rate loans going to be paid back?  Hong Kong’s banks, allegedly the safest in the world, are not so safe. .

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