The dilemma is particularly pressing for Hong Kong. Governing bodies have tied themselves in knots to keep cash flowing. And yet credit continues to tighten, while the signals from banks are ominous. Last week Bank of China Hong Kong, the biggest local bank by assets, warned on profits while revealing a whopping loan from its parent, China's third-largest bank. At US$2.5bn, the fundraising is almost four times the investment losses BoC HK has recorded so far this year, implying that the bank is fattening up for an exceptionally impaired 2009. The details of BoC's handout – a 10-year term, at a not especially punitive 200 basis points over Libor – suggest that this is no quick fix.
During the last credit contraction, between 1998 and 2003, Hong Kong suffered serious recession, deep deflation and a two-thirds fall in house prices. Back then, Hong Kong dollar loan-to-deposit ratios were much higher, at over 110 per cent versus about 80 per cent today, so banks were under greater pressure to call in riskier loans rather than roll them over. Still, if aggregate assets contract by under 3 per cent next year, bringing LTD ratios down to 2006 levels, that will mean a reduction in balances of about HK$70bn, estimates Citi. In that context, $10bn of loan guarantees from the Hong Kong Monetary Authority to small and medium-sized enterprises – always the easiest borrowers to turn away – seems seriously inadequate.