Hong Kong banks' loans to grow at a subdued rate of 3% in 2017

Strong expansion in credit activity is unlikely to be sustained.

According to BMI Research, Hong Kong's loan growth has picked up since H216 to 8.6% y-o-y in January (versus 0.3% y-o-y in June 2016), which has been in tandem with the cyclical recovery in economic activity in the mainland China (as seen from the increase in the manufacturing PMI to multi-year highs).

However, in BMI Research's view, this strong expansion in credit activity is unlikely to be sustained over the coming quarters. Hong Kong's banking sector and economy are tightly linked to that of the mainland Chinese economy, and structural weaknesses in the latter will weigh on the credit growth of the Special Administrative Region (SAR).

"We are therefore maintaining our forecast for overall loan growth in Hong Kong to grow at a subdued rate of 3.0% in 2017 (compared with an average annual rate of 5.4% over the past three years)."

Here's more from BMI Research:

The structural weaknesses that continue to weigh on the mainland Chinese economy include falling productivity growth due to the dominance of inefficient state-owned enterprises (SOEs), still significant excess capacity in the industrial sector (particularly coal and steel), and a corporate debt overhang.

In addition, the Chinese central government is also looking to rein in financial risks over the coming months by reducing the reliance of credit growth, which we expect to be negative for the expansion of loans in the mainland and the territory.

Despite setting a growth target of 6.5% (or higher if possible) for 2017, top Chinese leaders appear to be more open to not achieving this objective if doing so creates mounting risks within the economy.