Moody’s Slashes Hong Kong Rating After China Downgrade

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Hong Kong saw its debt rating cut by Moody’s Investors Service hours after China’s downgrade, highlighting potential risks from a tightening economic integration.

The former British colony has seen not only its property and stock markets increasingly entwined with the world’s second-largest economy, but its government as well. Moody’s cut the rating on local- and foreign-currency issuances to Aa2 from Aa1, and changed the outlook to stable from negative.

 That’s the territory’s first cut in ranking by Moody’s since the throes of the Asian financial crisis in 1998. China’s debt was lowered to A1 from Aa3 on concern the government won’t be sufficiently able to rein in a credit boom.

“Credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial and political linkages with the mainland,” Moody’s said in a statement late Wednesday. Closer financial ties “risk introducing more direct contagion channels between China’s and Hong Kong’s financial markets.”

Though the ratings company stressed that asset quality at the city’s lenders is high, the cut on the back of the China move adds to the challenges the territory faces, not least of which is a boom in property prices that threatens to undermine financial stability. Existing home prices continue to post fresh records, with the Centaline Property Centa-City Leading Index climbing to 156.44 as of May 14.

 As the twentieth anniversary of the handover from British to Chinese control approaches, the immediate response to China’s debt downgrade illustrates the growing closeness of the two systems.

Investors are taking the downgrade in stride in trading following the announcement, with the benchmark Hang Seng Index extending a five-day rally to the highest levels since July 2015 while the Hong Kong dollar was unchanged.

 Hong Kong disagrees

Hong Kong doesn’t agree with Moody’s decision to “mechanically” downgrade the city, Financial Secretary Paul Chan said in a statement posted on the government’s website. Moody’s has overlooked Hong Kong’s “sound economic fundamentals, robust financial regulatory regime, resilient banking sector and strong fiscal position,” he said.

The city has indeed started off 2017 on the upswing, as Hong Kong’s economy beat analyst expectations with a 4.3 percent expansion in the first quarter from year-ago levels. Retail sales also jumped for the first time in two years in March, buoyed by a recovery in tourism from China.

 By comparison, S&P Global Ratings has maintained an AAA rating for Hong Kong’s long-term debt since 2010, according to data compiled by Bloomberg. The city is currently one of only six issuers with that grade from S&P, including Canada, Norway, Denmark, Luxembourg and Liechtenstein, the data show. S&P has also assigned unsolicited AAAu ratings for six additional regions including Singapore, Switzerland, Australia, Germany, Sweden and the Netherlands, according to the data.



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