Sunday, March 27, 2016

Moody’s Downgrading Hong Kong’s Credit Rating: Unprecedented?

Despite being a traditionally viewed as a relatively safe investment for institutional investors, is the recent credit rating downgrade of Hong Kong by Moody’s unprecedented?

By: Ringo Bones 

Back in Marsh 12, 2016, the credit rating agency Moody’s downgraded Hong Kong’s credit crating to Aa1 and changed the outlook to negative from stable. Even after the July 1, 1997 handover back to China, Hong Kong has always been seen as a traditionally stable investment haven for institutional investors but the recent rationale for assigning a negative outlook by Moody’s is largely due to the increasing political risks of the hard-to-maintain policy of one country two systems as in “political linkages with China risk weighing on Hong Kong’s institutional strength. 

With the universal suffrage protests back in 2014 that virtually brought Hong Kong to a standstill to the recent “detainment” of bookstore proprietors who stock books who are critical with the Chinese communist party, it seems that China’s curbing of the political freedoms previously enjoyed by Hong Kong even after the 1997 handover from Britain are seen by many institutional investors around the world as a clear and present political risk that could affect the long-term economic outlook of Hong Kong despite enjoying a special administrative status. 

And given the recent economic slowdown of Mainland China many institutional investors see the economic and financial linkages of Hong Kong with the Mainland turn from positive to negative spillovers. Overall, Moody’s assessment is that banking-sector risk for Hong Kong’s government has increased. Although to most institutional investors who are worried about the declining freedoms in Hong Kong, Mainland China’s inability to maintain the one country two system policy of its special administrative cash cow of a region sends a big impression that it is the reason for the recent investment ratings downgrade. 

No comments: