Protests bans could hurt HK credit ratings

July 30, 2019 13:46
The right to protest is part of the 'checks and balances' in Hong Kong that support the city's institutional strength, Moody's has pointed out. Photo: Bloomberg

Hong Kong police's refusal to give the green light to two citizens' rallies in recent days may be aimed at preventing further clashes with the demonstrators, but the move sends out a dangerous signal that could jeopardize the city’s credit rating. Here is the reason why.

Currently, leading credit rating agencies Moody’s, S&P and Fitch offer Aa2, AA+ and AA+ ratings for Hong Kong respectively, compared with A1, A+ and A+ for mainland China.

Simply speaking, Hong Kong has a credit rating that is one or multiple notches higher than that of China.

That’s due to the city’s strong fiscal and foreign exchange reserves, 'One Country Two Systems', a more transparent market and a reliable legal system.

As the extradition bill has sparked widespread criticism and rallies all over Hong Kong, Moody’s issued a statement on July 5, pointing out that the right to protest is part of the “checks and balances” in Hong Kong that support its “institutional strength”.

It warned that erosion of such features of Hong Kong would be negative for the city’s rating outlook.

As we know, Hong Kong's top leader is not elected by Hong Kong citizens, and major officials are named by Beijing. In fact, the legislative council has basically lost its function for checks and balances after several pro-democratic lawmakers were disqualified from the parliament.

That means the chief executive or Beijing could push any policy if they want. As a result, protests or street marches have become the only way for the public to express their views, effectively serving as the ony remaining checks and balances.

Fitch also said in a report that there has been increasing concern that Hong Kong’ autonomy is getting chipped away, citing a series of incidents that included the Occupy Central event in 2014, the Greater Bay Area initiative and the extradition bill saga.

Fitch said it may need to review the city’s credit rating if that erosion continues.

What would be the consequence if Hong Kong’s credit rating was revised down?

That would mean higher financing costs, and thus lower corporate earnings and stock market valuations. The city’s housing market would not be immune to the negative impact either.

Knock-on effect could lead to capital outflow. Massive capital has flowed into Hong Kong since the 2008 financial crisis. A reversal of capital flow on a large scale would pose a threat.

It seems the administration intends to cool things down by banning the protests. But tens of thousands of people still took to the street over the weekend defying a police ban.

Banning protests won't calm the situation, but could instead backfire, including possible credit downgrades.

This article appeared in the Hong Kong Economic Journal on July 29

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist