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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

HSBC’s exposure to defaulted commercial property loans in Hong Kong surged almost sixfold to more than $3bn in the first half of this year, underscoring the risks the UK bank faces from a slump in the Chinese territory’s real estate market.

The London-headquartered bank had $3.2bn in “credit impaired” commercial real estate loans to Hong Kong clients as of June 30, up from just $576mn six months earlier, according to its financial report for the first half of this year.

Hong Kong is HSBC’s largest market for commercial real estate lending, accounting for 45 per cent of its exposure, in comparison with 18 per cent for the UK.

The bank’s total global commercial real estate lending was $79bn as of June. The $3.2bn in credit impaired loans made up 9 per cent of HSBC’s total Hong Kong commercial real estate lending.

The leap in defaults is a sign of how the commercial property downturn in Hong Kong, a financial hub that has for years been one of the world’s most expensive real estate markets, has started to hit banks. Prime office rents have fallen more than 35 per cent since 2020, according to commercial property adviser Cushman & Wakefield.

While banks have been under pressure for several years over their exposure to mainland China’s property market, the focus is now shifting to Hong Kong, said David Wong, head of North Asia bank ratings at Fitch.

“We’re a lot more comfortable saying a line has been drawn under [banks’ exposure to] China commercial real estate, versus Hong Kong,” Wong said. “I don’t think we’ve seen the bottom yet.”

Under the bank’s definition, those borrowers have breached the terms of their loan. That can include missing payments but it can also include “non-financial” measures such as the loan-to-value ratio missing an agreed target figure.

Georges Elhedery, who became HSBC’s chief executive in September, said on a call with analysts in early August when he was chief financial officer that the loans were “all performing” even though “a large number” were classed as credit impaired.

However, the bank said “certain borrowers have sought payment deferrals to accommodate debt serviceability challenges” in its financial report for the first half of this year, published on July 31.

HSBC told the Financial Times this week that “a lot” of the borrowers are still paying interest. A spokesperson for the bank declined to provide figures on how many borrowers were paying interest or to offer more detail on Elhedery’s comment.

Standard Chartered, which as with HSBC has more exposure to commercial property lending in Hong Kong than any other region, reported a rise in the proportion of lower-rated borrowers in its most recent earnings, though it did not mark any of the loans as credit impaired.

The lender has cut its unsecured exposure to Hong Kong commercial real estate borrowers by 19 per cent since the end of 2022, it said in filings in July. Standard Chartered declined to comment.

Higher interest rates have put Hong Kong borrowers under pressure at a time when demand for office and retail space has fallen, with China’s economic slowdown and Beijing’s national security crackdown hitting international investor confidence. Tough zero-Covid measures also prompted an exodus of foreign workers during the pandemic.

The HSBC figures show that Hong Kong groups accounted for 45 per cent of the bank’s total credit-impaired commercial real estate lending as of June, up from 13 per cent six months earlier.

Elhedery said on the earnings call that the bank had taken a “probably prudent approach” in reclassifying the loans and was “comfortable and confident in the medium-to-long-term outlook” for Hong Kong’s commercial real estate sector, which would benefit from any rate cuts.

The bank said in its filing that its collateral coverage was strong and “broadly stable” even as valuations fell, and it was making “relatively low” provisions for credit losses on the loans because of high collateralisation.

“I think for those of us living in Hong Kong you can see vacancy rates are higher at this point,” said Ming Lau, the bank’s Asia chief financial officer, on the analyst call. But he said that the loans were structured so that the bank had recourse to “other assets and cash” of the borrowers.

Eleven of Hong Kong’s biggest property developers have written down the value of their investment property portfolios by about $23bn since 2020, according to data compiled by UBS for the Financial Times.

Mark Leung, a property analyst at UBS, said there could be more writedowns for Hong Kong’s developers in the near future. “For offices, rent probably will continue to come down due to the inflated supply issue, and vacancies could edge up,” he said. 

Many of the territory’s property companies are controlled by tycoons and their families. Sun Hung Kai Properties is controlled by the Kwok family, Henderson Land Development by the Lee family, CK Asset by the Li family and New World Development by the Cheng family.

Gary Ng, a senior economist at Natixis, said that while the developers are expected to remain under pressure, most retained “sound financial positions” and could tap “old money” held by the tycoons and their families.

Earlier this year, President Aliyev of Azerbaijan stood up at the Petersberg Climate Dialogue in Berlin and told ministers, fossil fuels are a “gift from the gods.” Having oil and gas deposits is “not our fault” he went on, laying out further plans to increase natural gas production by more than a third.

But as leader of the host country for the upcoming annual climate talks in November, President Aliyev has an opportunity. He can be bold and make clear that fossil fuels are no longer part of our collective future—and neither should they be a part of our present.

We are standing at the precipice of a rapidly warming world, perilously close to crossing irreversible tipping points. Wildfires blaze across the globe, floods engulf towns and homes, and droughts cause starvation, leaving once fertile land barren.

As U.N. Secretary General Antonio Guterres has repeatedly said, any new investment in fossil fuels would be “economic and moral madness.”

The U.N.’s Summit of the Future taking place on Sept. 22-23 is about protecting future generations. We must ensure they are safe and secure, instead of vulnerable to climate shocks. 

What does that look like? A total fossil fuel phase out, a renewed commitment by developed countries to deliver climate finance—as well as loss and damage payments—and a green, just transition that puts people and jobs first, especially those in the Global South. 

In Sub-Saharan Africa, we are on the front lines of the crisis every day, through no fault of our own. Polluters must pay. 

Oil corrupts politics, empowers dictators, and erodes democracy, making wars more common. It’s enmeshed in a web of military deals and undermines global cooperation on the shared common threat to all life on earth: climate change. Oil is also one of the world’s most volatile commodities, especially now that the renewable market is booming and the price of wind and solar is falling. 

As we have seen, a lack of energy security breeds geopolitical tension—just look at Russia’s war against Ukraine and the chaos that ensued due to the reliance of European countries on Russian natural gas.

Climate-fuelled conflict has triggered greater population displacement, which leads to more demand for food in places where there is already a shortage. So we say this to leaders: stop investing in fossil fuels, stop digging up and burning fossil fuels, and stop forcing fossil fuels back into the ground where we grow the food that sustains us. 

We cannot eat coal. We cannot drink oil.

If we decarbonise the economy, powerful countries will have fewer reasons to send their militaries halfway around the world to secure the flow of oil.

Ministers will be meeting at the U.N. General Assembly in New York City next week, to sign The Pact for the Future, which calls for sustainable development and international peace. This is a pivotal moment to strengthen global cooperation in an increasingly fractured world​—and an important precursor for the outcome of COP29 in Baku.

Last year, at COP28 in Dubai, countries applauded themselves for agreeing to “transition away” from fossil fuels. Since then this conversation has fallen off their radars. 

As COP29 president-designate, Mukhtar Babayev’s recent letter makes clear, we will need “all hands on deck” to effectively advance the event’s two key pillars: raising ambition and enabling action. The technology and finance are largely available, but countries are not moving fast enough.

Last year it was urgent. This year it’s critical—we must be dogged in our determination and demand that our leaders listen. The longer we delay, the worse it will be.

Hezbollah launched a barrage of rockets from Lebanon overnight, landing much deeper into Israel than in previous attacks.

Residential buildings in Kiryat Bialik were set alight and some people were injured. Rescue teams arrived at the scene to treat the wounded, while Israeli security forces cordoned off the area.

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Angela Rayner has insisted she gave “nothing” to Lord Waheed Alli in return for the wealthy Labour peer’s generous donations, including a five-day stay in a Manhattan apartment and thousands of pounds of free clothing.

The UK deputy prime minister told the BBC as Labour’s annual conference kicked off on Sunday that politicians from all parties had accepted gifts “for years” and that “all MPs do it”.

“I promised nothing and gave him nothing in return,” she said of Alli’s donations.

The media tycoon has been at the centre of a furore that has overshadowed the run-up to Labour’s first conference as a party of government in 15 years.

Alli has given thousands of pounds of gifts including free clothing to seven sitting cabinet ministers including Rayner and Prime Minister Sir Keir Starmer.

Starmer initially failed to declare clothing gifts from Alli worth £16,200 to the prime minister personally and £5,000 to his wife.

Rayner said she understood that the general public was “angry and upset” and said that the rules had to apply to everyone in politics. “If there is a national debate about how to fund politics . . . let’s do that.”

Both Rayner and chancellor Rachel Reeves declared gifts of thousands of pounds of clothing from donors in parliament’s register of interests as generic support for their political work, the Financial Times revealed.

On Friday, Labour officials finally admitted that a £3,550 donation from Alli to Rayner in June consisted of work clothing.

They also confirmed that three other donations worth £17,650 from Alli had been spent at least in part on clothes. 

In an attempt to shut down the scandal, the party pledged on Friday that Starmer, Reeves and Rayner would not take any free clothing in future.

The Sunday Times today raised fresh questions, reporting that Rayner registered a five-day stay at Alli’s luxury Manhattan apartment for the new year but did not lodge the fact that her friend Sam Tarry stayed with her.

She said on Sunday that this did not break the rules. Her team said the presence of Tarry — who was a Labour MP at the time — did not need to be reported because Alli did not know he was there. 

Asked why she stayed in the flat for free, she told the BBC: “As friends do, a friend allowed me to stay . . . people do stay at other people’s apartments.”

On Sunday morning Rayner, who is also housing secretary, will promise a package of measures to ensure “decent homes for all” when she addresses the Labour conference in Liverpool.