Moody's cuts Hong Kong's rating outlook

Moody's downgrades city's outlook to negative on China links. "It's a totally wrong assessment," Financial Secretary John Tsang says

Hong Kong 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.

Expansion goal

Chinese Premier Li Keqiang announced a 6.5 per cent to 7 per cent expansion goal last week, down from an objective of about 7 per cent 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 per cent of gross domestic product.

Hong Kong is "very exposed" to any deterioration in China, given that about 60 per cent 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.

'Manageable' risk

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.

Credit agencies are misjudging the situation by lowering the outlook for China and its banking sector, China Banking Regulatory Commission Chairman Shang Fulin said, according to a CCTV tweet Saturday.

Moody's also said the strong political link embedded in the one country, two systems policy creates the risk that Hong Kong's institutions will lose some independence over time as China grows. Ahead of the 2017 election for Hong Kong's chief executive, tensions could rise further and impair the effectiveness of government policies, the agency said.

Tsang emphasised that the one country, two systems policy has been successfully exercised with diligence since 1997 and it has manifested into a very healthy economic situation and fiscal position in Hong Kong, together with a well-regulated banking system.

Unfavourable developments in China could lead to a sharp correction in Hong Kong's elevated property prices, exacerbating the pressure on banks' asset quality and profitability, Moody's said.

Tsang said banks in Hong Kong have a strong capital base and have prudently managed their property-related exposure. Following the implementation of seven rounds of counter-cyclical and macro-prudential measures by the Hong Kong Monetary Authority over the past few years, the banking sector is now more resilient in weathering property market adjustments, he said.

Daiwa's Lai is less sanguine.

"In the second half, we will see credit deterioration and the property market will struggle," he said. "There will be no doubt that this will create an excuse for the rest of the world to withdraw money out from Hong Kong."