Quantified: Hong Kong’s Exposure to China as Credit Risk Grows

  • Post author:
  • Post last modified:December 24, 2018

Financial market memory is very short. Participants seldom recall history to drive their next move. In these cases, it is worthwhile reflecting on how quickly market dynamics can change under stressful circumstances; like tight credit markets and slowing economic activity.

Lending is the backbone of modern economies and finance; it drives everything from long term capital investments to short term payables. With these ideas in mind, the current condition of the Asian-Pacific corporate and government bond market is concerning.

According to a press release from Fitch, a globally positioned credit rating agency, “China concentration is highest in Hong Kong, where it accounts for 32% of system-wide assets and where individual banks’ exposure – especially for mainland subsidiary banks – can reach up to 9x their Fitch Core Capital (FCC).” FCC is a primary measure of bank capitalization and risk.

Given the large presence of assets exposed to China in Hong Kong, a strong correlation can be implied when looking at credit trends and their potential ripple effects. For example, Fitch has a AA+ rating on Hong Kong bonds while China has an A+ rating. For context, the safest bonds are AAA; from the likes of the USA and Germany.

While Hong Kong is still “investment grade” with a “stable” outlook, some private sector entities have seen a variety of downgrades and red flags in recent news. Noble Group, with headquarters in Hong Kong, was recently warned by Moody’s, another globally positioned credit rating agency, when the firm took on a new borrowing facility. Yum! Brands, who owns iconic restaurant brands like KFC, Pizza Hut and Taco Bell, also recently indicated its new Chinese spinoff will take on a junk credit rating “with a balance sheet more consistent with highly leveraged peer


Investors, companies, and portfolio managers who are taking note from the bond market should consider if their own credit facility is secure when risks increase, as they seemingly are. In these cases historically, traditional lending has seized up…as the world saw during the great recession of 2007-2009…while the stock market continued to trade. The above scenario favors loans backed by liquid assets, stocks.

Squadron Holdings stock loan lending program provides fast and quantitatively driven stock based loans to clients from wealth managers to high net worth individuals. The firm is open to hearing from a variety of businesses, managers, brokers and arrangers who could benefit, or have clients benefit, from its premier services.

Visit squadronlending.com/brokers-welcome/ to learn about Squadron Lending’s referral program.