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.
“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.
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 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.