Moody’s ‘negative’ views on Hong Kong are one-sided but we should take heed of their concerns

The value of ratings agencies should not be discounted, even by a city in a very strong financial position that generally does not need to raise money

PUBLISHED : Tuesday, 15 March, 2016, 1:26am
UPDATED : Tuesday, 15 March, 2016, 1:26am

All eyes are on Hong Kong’s Aa1 sovereign debt rating – the second-highest possible – after the credit ratings agency Moody’s Investor Services changed the city’s long-term debt outlook from stable to “negative”. Experts have warned this could be followed by a rating downgrade. The financial secretary has lost no time in saying it is unjustified. John Tsang Chun-wah took strong exception to Moody’s reliance on Hong Kong’s close links to the mainland to justify a downbeat outlook, describing it as totally wrong. Moody’s cited dependence on trade amid a slowdown in the mainland economy, “evidence of interference [from China] in policy . . . [and] increasing political linkages [that] are likely to weigh on Hong Kong’s institutional strength”.

Tsang dismissed concerns about close ties with the mainland by citing the city’s sound economic fundamentals, robust regulatory regime, resilient banking sector and fiscal strength as enough to handle any challenges down the road, adding that it all amounted to a China opportunity, not a China risk.

Moody’s view does seem rather one-sided in that it over-emphasises political factors, at the expense of the economic opportunities to be found in capitalising on the mainland’s development under the “one country, two systems” concept.

If it is followed by a rating downgrade, it could have an impact on the cost of borrowing for infrastructure projects, but Hong Kong does not have that many projects for which it needs to borrow. Tsang is right to argue that it is unfair to Hong Kong. Indeed, in respect of Moody’s concern about China’s influence on Hong Kong, the messages that have come out of the annual CPPCC and NPC sessions have focussed on the mainland’s economic development and how Hong Kong can make good use of the 13th five-year plan for 2016 to 2020 to tap into China’s growth.

That said, the value of ratings agencies should not be discounted, even by a city in a very strong financial position that generally does not need to raise money. A lot of business people have reference to such ratings in reaching investment decisions. Therefore, with China’s economy slowing down and growth prospects contracting, we should not lose sight of how foreign enterprises view Hong Kong as a place to do business, or of the potential negative impact of the volatile political situation here. Ironically, some would see that as adding weight to Beijing’s entreaties to Hong Kong to focus less on political issues and more on the economy.