The time bomb of leaping bad loans worldwide may explode anytime. Dear Hong Kong and mainland bankers, please beware of the growth in banks' non-performing loans!

Hong Kong's economy is closely linked to that of the mainland. If the mainland had a non-performing loan problem, inevitably it would cascade into this world city in southern China. Prevention is always better than cure, as the saying goes. Please take measures to diffuse this situation. There is no room for complacency.

The China Banking Regulatory Commission reported in mid-August that total non-performing loans rose 4.15 percent in the second quarter from the previous quarter to 456 billion yuan. The rising number of bad loans stems mainly from the excessive and indiscriminate lending in 2008 and 2009 to tackle the financial tsunami.

Municipal governments on the mainland which borrowed heavily in the past few years to invest in infrastructure projects may find it hard to generate enough cash to repay debts. For instance, as the economy slows, the number of people taking high-speed trains will drop. The Ministry of Railways, which borrowed 2.5 trillion yuan to construct the high-speed rail system, has a hot potato to deal with.

If Chinese bankers think help may come from the West, they'd better think again. Non-performing loans in US banks increased to 2.82 percent in the first quarter of 2012, up from 2.81 percent in the previous quarter. Between 1996 and 2008, the non-performing loans ratio was below 1 percent among US banks.

While European countries are struggling to overcome the debt crisis that has overwhelmed several members of the eurozone, the almighty US economy has shown signs of fatigue. According to the US Bureau of Economic Analysis, gross domestic product grew only 1.5 percent in the second quarter of 2012, slower than the first quarter's 2 percent.

A downturn in US and European economies contributed to the sharpest drop in foreign direct investment (FDI) on the mainland last month. The Commerce Ministry said in mid-August that the FDI dropped 8.7 percent in July from a year earlier. The decline was due to rising labor and property costs on the mainland, as well as fierce competition from other developing countries.

Problems in Europe and the US also hurt Chinese exports. The Ministry of Commerce said exports grew only 1 percent in July, compared with a 20 percent increase in all of 2011. A Ministry of Commerce spokesman stated that the mainland faced "a bigger challenge" to reach its full-year target of 10 percent growth in exports. Exports account for about 30 percent of China's GDP, and upon exports many jobs depend. Rising unemployment might lead to social unrest, which we must try to avoid.

Beijing's policy of reining in the red-hot property market also contributed to a FDI slowdown in this sector. As the mainland economy slows, some people might expect the central bank to cut the required reserve ratio for financial institutions to make available more funds to boost economic growth. They would be mistaken, however. Bankers of the People's Bank are well aware of the threat of inflation to the national economy.

Import-inflation may become a threat too. The drought in many parts of the US has boosted prices of food staples. World Bank figures show that the barley price index jumped 8 percent to 249 in July 2012 from 230 in June; the price index for maze rose 25 percent to 333 in July from 267 a month earlier; the US wheat price index surged 25 percent to 345 in July from 276 in June; and the world sugar price index leaped 11 percent to 50 in July from 45 in June.

On Aug 20, shares of mainland banks traded on the Hong Kong Stock Exchange fell substantially from their 52-week high. Bank of China and Minsheng Bank both dived 14 percent, and Bank of Communications 21 percent. These declines are sharper than the Hang Seng index's fall, which plummeted 8 percent from its 52-week high of 21,760 to 19,950.

If the stock prices of mainland banks are any indication, they show that the journey ahead is rocky and uncertain.

The author is coordinator of Hong Kong Baptist University's financial journalism program.

(HK Edition 08/23/2012 page3)