HKSAR Financial Secretary questions Moody’s over debt downgrade

Hong Kong Financial Secretary Paul Chan

Moody’s Investors Service’s decision to downgrade Hong Kong’s debt rating last week was based on “shallow” evidence, Hong Kong Financial Secretary Paul Chan wrote in a blog yesterday.

“The evidence on which the ratings company mechanically downgraded Hong Kong’s debt rating based on the very close economic relationship between Hong Kong and the mainland is shallow,” Chan wrote in a blog on the official website of the financial secretary. Enhancing cooperation with the mainland cannot be considered negative as China is the main growth engine for the global economy, he added.

Moody’s cut its rating on China’s debt for the first time since 1989 last week, a challenge to the view that the country’s leaders can rein in leverage while maintaining the pace of economic growth. Hours later, the company cut the rating on Hong Kong’s local- and foreign-currency issuances to Aa2 from Aa1, and changed the outlook to stable from negative. It was the territory’s first cut in ranking by Moody’s since the Asian financial crisis in 1998.

“Credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial and political linkages with the mainland,” Moody’s said in its statement. Closer financial ties “risk introducing more direct contagion channels between China’s and Hong Kong’s financial markets.”

Hong Kong’s government said in a statement on its website shortly afterward that it disagreed with the decision by Moody’s, citing Chan. The ratings company overlooked Hong Kong’s “sound economic fundamentals, robust financial regulatory regime, resilient banking sector and strong fiscal position,” the government said.

Chan, who was appointed Hong Kong’s financial secretary in January, expanded on that argument with his blog post yesterday. He said Moody’s concern for China’s economy lacked objective evidence because growth and exports this year have improved, while steel and coal oversupply have eased. In response to Moody’s “contagion channels” worry, Chan said Hong Kong’s financial system is very stable and it has policies in place to improve risk management for mainland-related loans.

The rating firm’s outlook cut in March 2016 has proven to be “exaggerated” based on economic growth since then, Chan also wrote. Moody’s cut Hong Kong’s outlook to negative from stable last year because it said the city’s credit profile tracked China’s. Days earlier, it lowered China’s credit-rating outlook, highlighting the country’s surging debt burden and questioning the government’s ability to enact reforms.

China’s currency and stocks rallied despite last week’s debt-rating downgrade. The onshore yuan strengthened 0.5 percent, the biggest weekly gain since July 2016. Shanghai’s benchmark gauge climbed 0.6 percent last week, the most since the week ended April 7. Daniela Wei, Bloomberg