Standard & Poor's upgrade based on rebounding economy, property market Hong Kong has achieved the highest credit rating in its history after Standard & Poor's rating service lifted the outlook on the city's A+ long-term foreign currency rating to 'positive' from 'stable'. The rating agency linked the improvement in the government's financial report card to the rebounding economy and property market, as well as a return to inflation. Paul Coughlin, S&P's managing director for corporate and government ratings in Asia, said: 'The change in the outlook is largely due to the change in the deficit situation. We believe that the goal of reducing and eliminating the deficit is quite realistic now.' A positive outlook means the rating may be raised over the medium to longer term, while 'stable' denotes that a rating change is unlikely. A further upgrade of Hong Kong's creditworthiness would bring it into AA territory, a long-term foreign currency rating Hong Kong has never attained from S&P. The local currency rating remains unchanged at AA- with a stable outlook. Higher ratings allow Hong Kong to borrow funds more cheaply. Both Fitch Ratings and Moody's Investors Service said they will maintain their current long-term foreign currency ratings for Hong Kong. Moody's has assigned an A1 rating with a stable outlook since October 2003. Fitch has not touched its rating - AA- with a stable outlook - for a year. According to S&P credit analyst Philippe Sachs, Hong Kong's positive ratings revision reflects the mainland's growing influence on the city's creditworthiness, and changes to China's ratings may be followed by similar ones here. The outlook on China's BBB+ rating, which is three grades below that of Hong Kong, is also positive. 'Hong Kong's stability and autonomy as a financial centre are integral to China's ability to raise and more effectively allocate capital,' Mr Sachs said. 'Therefore, China is widely expected to continue respecting Hong Kong's economic, fiscal and monetary autonomy.' Mr Coughlin added that China's fiscal consolidation, higher tax revenues and banking sector reforms would bode well for Hong Kong's ratings. He said these positive developments would help shield Hong Kong from any fallout stemming from possible political and economic shocks on the mainland. He stressed that S&P considers Beijing's Basic Law interpretation on the term of Hong Kong's next chief executive as 'not unduly surprising to us'. 'So we don't regard it as a major change to Hong Kong's credit fundamentals,' he said. A revaluation of the yuan is also expected to bring welcome consequences to the city, although Thomas Chan Man-hung, who heads Polytechnic University's China Business Centre, noted that investor confidence in Hong Kong would not necessarily be affected. 'Everyone seems to think that an appreciating yuan will be positive for Hong Kong, but I feel that investors here will just pocket their gains and leave,' Mr Chan said. 'I don't see credit risk in China as being necessarily higher than in Hong Kong.' In the medium term, however, Hong Kong's financial health still faces a number of structural problems that have yet to be fully addressed, warned Brian Coulton, a Fitch senior director in Hong Kong. These include an uncertain outlook for future land sale proceeds and other revenue-related items. Fitch will complete its annual ratings review in the next few weeks.