Hong Kong banks face heightened risks from close Chinese ties: Fitch

The credit rating agency noted that China's governance standards are lower than Hong Kong's.

Hong Kong's intricate economic and financial ties with the Mainland pose risks to its thriving financial services sector as credit rating agency Fitch has downgraded its assessment of the operating environment of banks in the Asian financial hub.

“We believe that Hong Kong's growing connectivity with China's economy and financial system creates risks for the robustness, effectiveness and independence of Hong Kong's regulatory and legal frameworks,” Fitch noted, adding that China’s governance standards are substantially lower than Hong Kong’s.

Also read: Close Chinese ties are both boon and bane for Hong Kong banks

The city also faces high macro-prudential risk due to above-trend credit growth and heated property price inflation which Fitch similarly attributes to deepening ties with the Mainland.

Growth in the private-sector credit/GDP ratio has been more than 5pp above trend since 2010, and hitting 20pp above trend in 2017.

High property price inflation has increased spill-over risks to Hong Kong's economy, even though banks' direct exposure to this sector is small. As a result, mortgage debt has been on an upward trend alongside rising levels in household debt.

Also read: Hong Kong loans up 3.6% in Q1 amidst intensified construction activities

Fitch’s operating environment assessments are different from its ratings as it takes into account other factors such as the economic environment and existing regulatory and legal frameworks