As pointed out here months ago, monetary tightening of China has made credit difficult to come by. As a result, some companies have had to borrow from the shadow banking system. Meanwhile, other companies which have access to the Hing Kong banking system have been borrowing there as credit is much cheaper (from the perspective of Hong Kong banks, lending to Chinese companies is more profitable than, say mortgage lending in Hong Kong), leading to an unintentional tightening in Hong Kong credit.
As a result of that, Hong Kong banks exposure to China has surged very dramatically in the past year and half. In fact, according to Bloomberg Brief’s Michael McDonough, Hong Kong banks exposure to the Mainland China is now larger than the size of Hong Kong economy:
I am not sure to what extent we should be worried about this. The good thing is that 83% of the exposure to China are claims on Chinese banks according to Michael McDonough, which are largely state-owned and will likely be backstopped by the government in the event of crisis.
That said, it isn’t a good thing to see banks increasing exposure to an economy which is entering an unknown correction, even if the exposure still looks very safe.