The Hong Kong Connection: Postscript

The role played by Hong Kong's banks in the outflow of capital from China over recent months has a further consequence which is worth pointing out clearly. Very regularly, when faced with unexpected surges in China's trade balance, analysts scrutinise trade flows between Hong Kong and China particularly closely, looking for (and often finding) evidence of over-or-underinvoicing for exports and imports. 

The point to make is this: even if this succeeds in inflating China's overall trade surplus, if at the same time it inflates Hong Kong's trade deficit, then that will erode the very private sector savings surplus upon which Hong Kong relies to fund (or even maintain) its net bank lending to China.  In this symbiosis, the trade money flows to China, but that generates a demand by Hong Kong's banking system to claw it back by cutting credit lines to China. 

It didn't always work this way: when Hong Kong had a regular major savings surplus, or when net lending to China wasn't virtually the whole of Hong Kong's net foreign lending, the relationship would have been contingent, mild and even effectively non-existent. But that's not the case anymore: if China swells Hong Kong's trade deficit, Hong Kong will (must) get the money back by cutting lending to China. That's the symbiosis.