Hong Kong's Tsang defends economy after Moody's outlook cut

HK Financial Secretary John Tsang defended the city's economy after Moody's Investors Service cut the city's long-term debt outlook because of its links to China.

Moody's maintained Hong Kong's long-term debt and issuer ratings at Aa1 and downgraded the outlook to negative from stable because it sees the city's credit profile tracking China's, the agency said Saturday. The firm lowered China's credit-rating outlook on March 2 as a rising debt burden, falling foreign-exchange reserves and uncertainty about authorities' capacity to implement reforms weigh on its economy.

"It's a totally wrong assessment. And they can just look at economic conditions that we have, and actually, maybe it's really time to consider an upgrade for Hong Kong," Tsang said in a statement posted on the government's website. "Hong Kong is in a good position to benefit from the structural rebalancing in the mainland's economy from investment to consumption," he said in a separate statement.

Hong Kong's economy, dependent on China trade, may see "muted" growth over the next five years with a possible increase in its banking sector's credit risk given its exposure to corporations in the world's second- largest economy, Moody's said.

Chinese Premier Li Keqiang announced a 6.5 percent to 7 percent expansion goal last week, down from an objective of about 7 percent last year and the first range the government has offered since 1995. The nation has been burning through foreign reserves to defend the yuan, depleting the stockpile by $513 billion last year. That ' s the first annual drop in more than two decades, at a time when debt levels have reached an unprecedented 247 percent of gross domestic product.

Hong Kong is "very exposed" to any deterioration in China, given that about 60 percent of the city's bank credit goes to mainland borrowers, said Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets.

If global investors start to feel negative about China and withdraw capital from Hong Kong, the city will face "a huge liquidity crisis as it will be very difficult for Hong Kong to get money back from China because of credit issues or capital controls," Lai said by phone.

Tsang said the risk associated with mainland-related lending is "manageable." The credit quality of mainland borrowers is high, given the majority of them are large state-owned enterprises and multinational companies, he said.