18 February 2019
Hong Kong's growing linkages with China has meant that negative credit rating actions on the mainland are also affecting the city. Photo: Reuters
Hong Kong's growing linkages with China has meant that negative credit rating actions on the mainland are also affecting the city. Photo: Reuters

What’s to blame for the HK rating outlook cut?

After Moody’s revised its outlook on Hong Kong’s credit rating to “negative” earlier this month, the agency’s chief rival, Standard and Poor’s (S&P), has now followed suit.

In a statement Thursday, S&P said it has downgraded the Hong Kong rating outlook to reflect a similar move on mainland China, where it said an economic rebalancing could take longer than expected. 

“We do not believe that the credit standing of Hong Kong can be completely disconnected from that of the mainland, given financial and economic linkages, and the ultimate sovereign authority of China,” the rating agency said.

Although S&P affirmed Hong Kong’s top-notch ‘AAA’ long-term rating, the change in outlook to negative from stable raises the risk that the rating could be lowered within the next couple of years.

The outlook revision and the accompanying comments will provide fire power to those who argue that Hong Kong should reduce its economic dependence on the mainland.

Doubts are growing among observers if China can manage its economic and financial risks well.

According to S&P, government and corporate leverage ratios in the mainland are likely to deteriorate and the investment rate could be unsustainable.

That “could weaken the Chinese economy’s resilience to shocks, limit the government’s policy options and increase the likelihood of a sharper decline in trend growth rate”.

Beijing and Hong Kong officials, of course, don’t agree with the assessment of the rating agencies.

Hong Kong’s acting financial secretary K.C. Chan said late Thursday that the mainland will remain a key source of growth and stability for the global economy despite the uncertain world environment.

“Hong Kong is in a good position to benefit from the structural rebalancing in the mainland economy from investment to consumption,” he said, adding that services demand growth in China “will create new business opportunities” for Hong Kong.

Moody’s and S&P have been expressing concern about China as they feel the economy is coming under increased stress due to slower growth and the difficulties faced by Beijing on reforms front.

Hong Kong is also seen affected as the city has come to rely too much on China’s economic well-being since the 1997 handover.

A clear example is the dependence of Hong Kong’s retail and tourism-related businesses on mainland visitors.

The individual travel scheme, introduced by China in 2003, had a big impact on Hong Kong’s tourism and retail industries, prompting them to focus more on serving the Chinese big spenders, rather than local consumers and tourists from other countries.

Yes, the visitors did contribute significantly to Hong Kong in the past decade. However, as China’s growth slowed recently, the city suffered as there was a steep drop in the number of mainland tourists.

In February, Hong Kong saw its retail sales decline for the twelfth straight month, falling 20.6 percent compared with the same month last year. It marked the largest drop in 17 years.

Despite Beijing’s growing political and economic influence in Hong Kong, local officials refuse to accept the argument that the close links could undermine the city’s international status.

Blockage of electoral reforms in Hong Kong, and events like suspected abduction of some booksellers, have led to worries that Beijing is going back on the “one country, two systems” pledge.

Foreign investors want a stable social and political environment, more than anything else.

But Hong Kong, under Chinese rule, can no longer provide an assurance of such stability, given people’s growing discontent over a host of issues.

While Beijing and its loyalists point a finger at the opposition camp for stalling key decisions, the fact remains that the root cause of many controversies lies in the central government’s policy approach toward the special administrative region.

The ratings outlook revision by Moody’s and S&P could be taken as a vote of no-confidence on China’s commitment on “one country, two systems” implementation and preservation of the so-called high degree of autonomy enjoyed by Hong Kong people.

The Communist Party’s practice of putting political interests above all else will only hurt Hong Kong and its economy in the long run.

Beijing should realize that it may be lighting a fire in its own backyard. If Hong Kong loses its standing in the global financial world, China will also suffer.

Let’s hope the Communist leaders bear this in mind. 

– Contact us at [email protected]



EJ Insight writer

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