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The Effects of Monetary Policy on Cross-Border Banking between China and Hong Kong

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  • Lorenzo Garlanda-Longueville

Abstract

Hong Kong has been China’s largest net banking creditor from 2009 to 2023, with an important decline starting in 2015. This paper presents an explanation for this decline and assess the impact of Chinese and US monetary policy on international positions between China and Hong Kong during this period, using a local projection approach. Our results indicate that a large part of the decline in the level of outstanding amounts can be attributed to the People’s Bank of China’s (PBoC) accommodative monetary policy and its direct consequence: the narrowing of the spread between Chinese interest rates and those of advanced countries. We explain this development by yield-seeking behavior on the part of international banks resident in Hong Kong. In line with recent literature on the transmission of Chinese monetary policy, we show that the PBoC now operates fully within a market interest rate logic and no longer through purely quantitative instruments (quotas, credit controls and reserve requirements). Finally, our results indicate that the effect of Chinese monetary policy on Hong Kong’s international banking assets is stronger than that of Fed policy, despite the currency peg to the dollar.

Suggested Citation

  • Lorenzo Garlanda-Longueville, 2025. "The Effects of Monetary Policy on Cross-Border Banking between China and Hong Kong," EconomiX Working Papers 2025-16, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2025-16
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    File URL: https://economix.fr/pdf/dt/2025/WP_EcoX_2025-16.pdf
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    More about this item

    Keywords

    International Banking; Hong Kong; China; Monetary Policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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