TNAG-2467-FCO40-3591-Economic-situation-in-Hong-Kong-1992 — Page 63

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majority of all types of business is with Japan. It is well kno that Japanese banks use Hong Kong as a convenient channel between their on-shore and off-shore operations in Japan, no doubt encouraged by Hong Kong's lenient tax treatment of foreign earnings (see

paragraph 3.24). Some non-bank lending to Japan (76% of the total of

foreign non-bank lending out of Hong Kong at end-1990) also passes through Hong Kong and is perhaps more of an indicator that Hong Kong has a role as bona fide regional financial intermediary. No doubt

Japan represents a good credit risk for banks lending out of Hong

Kong (perhaps mainly Japanese banks?) and the overall scale of economic activity compared with other countries in the Far East like

Australia and New Zealand must help explain the dominance of Japan in

non-bank lending. After Japan, Singapore and the UK rank next, almost

entirely inter-bank.

2.13 China ranks a distant second to Japan on non-bank lending by

banks in Hong Kong, representing only 5% of total lending and just 6.6% of lending to Japan at end-1990. Given the large and rapidly growing trade links between Hong Kong and China, much of this lending

may well be short-term in nature. As closer investment ties develop,

however, the level of lending may well increase although even then

much lending may continue to be made to Hong Kong companies in Hong

Kong for their use in Southern China rather than directly cross-

border. Hong Kong also has the geographical dynamism of Guangdong

Province and the Special Economic Zones of Shenzhen and Zhuhai. Its outreach extends to the adjoining provinces of Guangxi and Fujian,

though Taiwan also provides seres to the latter. The demand for

financial services of these provinces is unlikely to diminish and

their ability to satisfy their needs within China is limited.

2.14 The overall picture of cross-border banking in Hong Kong is a

curious one. Given the dominant position of Japan both in inter-bank

and non-bank activity, Hong Kong's role as a regional banking centre seems remarkably narrow and specialised. If Japanese banks encounter

profitability problems the volume of business through Hong Kong may diminish. However, to the extent that much of the business is book

operations, its value added to the Hong Kong economy may be modest.

2.15 Singaporean data does not allow direct comparison. Asian

Currency Units' (ACUs) activities are disaggregated into bank and

non-bank together with an overall analysis of the maturity structure