Moody’s slashes Hong Kong rating

Agency cites the city’s link with the mainland and more China-related lending by banks

Hong Kong yesterday hit back at a decision by Moody’s to cut its credit rating on the city, which the agency said was becoming increasingly close to mainland China.

The move was announced hours after the firm downgraded China for the first time in almost three decades citing concerns about its ballooning debt and slowing economic growth.

Moody’s decision came as China tries to clean up a toxic brew of unregulated and risky lending that for years has fuelled the economy’s spectacular growth, though some analysts doubt Beijing’s willingness to quit its debt addiction. Beijing rejected the cut, saying Moody’s had used an “inappropriate” method to assess the risks facing the economy.

In downgrading Hong Kong, the agency outlined the growing links between the city and the mainland, with banks increasing China-related lending, while its stock market is also linked to bourses in Shanghai and Shenzhen through separate tie-ups.

The city’s involvement in China’s Belt and Road initiative also brings its economy and financial systems closer to the mainland, Moody’s said.

“The downgrade in Hong Kong’s rating reflects Moody’s view that 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,” it said in a statement.

“The institutional features which grant Hong Kong, at present, a degree of political and economic independence — together with the SAR’s intrinsic credit strengths — allow Hong Kong’s rating to exceed that of China. But the two ratings, like the two regions, remain closely linked,” it said.

Moody’s cut Hong Kong from Aa1 to Aa2, but upped its outlook from negative to stable. Earlier, it had downgraded China to A1 from Aa3 — its first since 1989 months after the Tiananmen Square crackdown — and also increased its outlook to stable from negative. It affirmed the Aa3 rating of Macau and upgraded its outlook to stable from negative.

Hong Kong’s Finance Secretary Paul Chan said yesterday he “strongly disagreed” with the move. “We are of the view that Moody’s has overlooked the sound economic fundamentals, robust financial regulatory regime, resilient banking sector and strong fiscal position that Hong Kong has,” Chan said.