Hong Kong has become more dependent on the mainland for growth than in 1997, and would be more vulnerable to economic fallout if China were to suffer a hard landing or financial crisis, S&P Global Ratings said.
Hong Kong’s integration with the mainland is deepening, but there is no sign that the territory’s institutions are becoming more like those in the mainland, the agency said in a report titled “Hong Kong 20 Years After The Handover To China: More Opportunity, More Competition.”
“For the past two decades, Hong Kong has maintained economic, financial and governance systems that are separate and very different from the rest of China, in line with the ‘one country, two systems’ framework,” the agency’s credit analyst Kim Eng Tan said.
In fact, the city’s exceptional degree of autonomy in many policy areas is a key reason why the agency’s credit rating on the special administrative region is higher than that on the Chinese government, S&P Global Ratings said.
Hong Kong’s rating is “AAA” while that for the Chinese government is “AA-/Negative/A-1+”.
The agency, however, noted that the territory is becoming increasingly dependent on the mainland for growth.
“Our negative outlook on Hong Kong is in line with our outlook on the rating on China,” the agency said.
It said the territory’s growing integration with China brings tremendous opportunity to the former British colony, but “it also increased competition and concentrated economic dependency”, said Christopher Lee, a credit analyst at the agency.
Lee said mainland business boosts retail, tourism, banking, insurance, and other industries in Hong Kong.
For example, customers from across the border contributed more than 35 percent of Hong Kong-based insurers’ new premiums last year, and new listings by Chinese companies have made Hong Kong the world’s top market for initial public offerings for the past two years, Lee said.
At the same time, Hong Kong companies are increasingly competing with mainland firms.
Many mainland firms have been snapping up stakes in SAR firms, bidding up land atpublic auction, and contributing to soaring office and residential rents, S&P Global Ratings said.
Resentment over perceived economic, cultural, and political crowd-out eruptedin the form of public protests in recent years, such as the 2014 UmbrellaMovement, it said.
Despite rising tensions, the agency believes that major changes in Hong Kong policy remain an unlikely scenario.
S&P Global Ratings cited the US dollar peg, which it said has been a symbol of Hong Kong’s distinct financial system.
Under the Basic Law, the city’s de facto constitution, Hong Kong is required to maintain its economic model of free and open markets, theagency said.
Pegs work well in small, open economies, but the downside is that Hong Kong gives up its right to set local interest rates. Still, the trade-off is worth it at this stage, Asia-Pacific chief economist Paul Gruenwald said.
“The linked exchange rate system has served Hong Kong well since 1983 and should be maintained,” he added.
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