How exposed are Hong Kong banks to the mainland?

Exposure hit 29.3% of system-wide assets as of March 2017.

According to Fitch Ratings, Hong Kong banks' Mainland China exposure (MCE) rose to 29.3% of system-wide assets at end-March, up from 27.3% at end-December. Rising interconnectedness between the Hong Kong and Chinese economies is driving growth now that the fall in FX-speculation-linked lending in 2015 has run its course.

Here's more from Fitch:

Client referrals from Chinese parent companies of bank subsidiaries based in Hong Kong remain a key source of growth in Hong Kong exposure to mainland borrowers. We also expect Hong Kong banks' mainland subsidiaries to grow as they expand their retail operations in southern China. These subsidiaries have become more active in mortgage lending in major Chinese cities, but this could slow as a result of the tightening of local regulations to cool the housing market.

Steady growth in lending to Chinese corporates and other non-bank borrowers - particularly private and non-mainland entities - is likely to continue, in part to support their expansion overseas. The non-bank segment accounted for almost three-quarters of Hong Kong lenders' MCE at end-March 2017.

Claims on banks tend to be more volatile than those on non-banks, as shown by their 25% growth in the first quarter. The strong rise in 1Q17 could be an indication of a pick-up in trade-related growth, given that MCE to banks often takes the form of a Chinese bank's guarantee of corporate exposure. Exposure to banks accounted for 26% of MCE at end-March, up from a low of 23% at end-December 2016, but still well short of the peak of 43% three years earlier.

Fitch continues to view China-related exposure as the biggest asset-quality risk for Hong Kong's banks, given that China's economy is highly leveraged and is going through a structural slowdown.

That said, MCE has performed relatively well so far, even if the latest data show that the quality of banks' MCE continued to slowly deteriorate on average last year. A few banks have suffered above-average China-related losses, and some have scaled back their riskier onshore SME lending.