WHAT is Financial Services Secretary Michael Cartland trying to say? Does he really believe that despite Hong Kong's reversion to Beijing rule it will be unaffected by economic, financial and fiscal policies across the border? If China's credit economic outlook takes a sudden turn for the worse because of rampant inflation or renewed trade hostilities with the United States or political upheaval in Beijing or a host of other possible factors, does Mr Cartland really believe that Hong Kong will go unscathed? Despite all the assurances that nothing will change after 1997, there will be one major change: China, which has an A3 rating from Moody's and a less than stellar BBB rating from Standard & Poor's (S & P), will have sovereignty over Hong Kong. That is what the talks were about in the early 1980s. China's sovereign credit rating must therefore act as an implicit ceiling on Hong Kong's rating. Moody's said its rating of Hong Kong reflects Hong Kong's growing integration with southern China, and S & P said Hong Kong's rating would move in step with China's over the medium term. Hong Kong's masterful economic, financial, fiscal and trading record may entitle it to a top Aaa rating from both agencies, but all those pluses are negated by political risk. Moody's has taken a pessimistic view about the possible downside of 1997. 'In a world of volatile capital movements, and in a financial system as open as Hong Kong's, any fears regarding the integrity of the system could easily jeopardise the territory's economic success,' Moody's says. 'Nobody expects Hong Kong to disintegrate into economic chaos,' Moody's hastens to add, but it is paid to take a fairly jaundiced view of things. The agency has advanced three possible alternative scenarios. 'One is that Hong Kong continues to play its traditional role as China's outlet to the world,' it said. 'The second is that Hong Kong becomes absorbed into China on a de facto but not de jure basis. The Chinese Government might continue to follow the letter of the agreement [the Joint Declaration with Britain] but use every available means to circumvent the intent of the declaration. 'In the third instance, the most extreme case, China might abrogate the accord completely, despite the fact that the agreement is considered internationally binding because the document is registered with the United Nations.' After 1997, no outside power, even Britain, would be able to prevent abrogation of the agreement, the agency notes. Moody's is not predicting that the worst will happen. But it would be totally unprofessional if it did not point out that bringing two disparate entities like Hong Kong and China together under one roof does carry some risk. Nobody thinks for one moment that China wants to turn Hong Kong into a collective farm or the Number 37 Hong Kong Special Administrative Region Tractor and Bicycle Works. But Moody's cites as an example of a potential problem the growing use of the Hong Kong dollar as a medium of exchange throughout southern China. The risk to the Hong Kong dollar is that at some time in the future a Chinese government might decide it is more advantageous to unify the yuan and the Hong Kong dollar than maintain two distinct currencies, it says. Or Beijing might - with even the purest motives - decide to alter the dollar peg to improve Hong Kong's competitive position. If the markets interpreted such a move negatively - and markets have been known to take a dim view of currencies in this neck of the woods - confidence could erode. Moody's is not saying that Hong Kong's economy is badly managed or that it is heavily indebted or in any way similar to some of the Latin American emerging markets. Hong Kong is a vibrant economy, with vast foreign exchange reserves, solid growth and low unemployment - and if it wasn't for the political risk it would probably be on a par with Singapore. But all bets are off after 1997 until investors, bankers, politicians, bond dealers and others see how things work out. Rating agencies are paid to think the worst and report accordingly. Politicians, on the other hand, clearly have a habit of hoping for the best, and reporting accordingly.