Ratings agency Moody’s has downgraded the status of Hong Kong’s Aa1 credit rating outlook from stable to negative, in a move the ratings agency says reflects Hong Kong’s increasing dependence on China.
The change, which applies to the long-term debt issued by the Hong Kong government, follows Moody’s’s decision to move China’s Aa3 rating to negative outlook.
Moody’s explained the decision as being due to Hong Kong’s “tightening political, economic and financial linkages with the Mainland”.
“In particular, increasing political linkages are likely to weigh on Hong Kong’s institutional strength,” it said. “In addition, the risks to China’s economic and financial stability may also undermine Hong Kong’s own economic and financial outlook.”
Moody’s said that while Hong Kong’s strengths support a higher credit rating than China’s, its close economic and political ties with the mainland “have the potential to adversely affect Hong Kong’s policy credibility and effectiveness over both the near and longer term”.
“Political risk has risen in Hong Kong in light of ongoing tensions over the implementation of the ‘One Country, Two systems’ policy. In the near term, tensions could rise further, in particular ahead of the 2017 election for Hong Kong’s Chief Executive, and impair the effectiveness of government policies,” the ratings agency said.
Political and regulatory issues aside, Moody’s pointed out that Hong Kong’s economy is heavily reliant on China’s. In 2015, it said, 43.6% of Hong Kong’s exports of domestically-produced goods and 53.8% of its re-exports were shipped to China. Its tourism industry is no less reliant on China, with 77.3% of tourist arrivals coming from mainland China, up from 63% five years ago.
Hong Kong’s finance sector is also closely tied to China, with bank lending to the mainland accounting for 15.7% of total assets, Moody’s said. A correction in Hong Kong’s financial sector could lead, it said, to a “sharp correction” in the “inflated” property sector.
