HONG KONG • Hours after its surprise China cut, Moody's Investors Service reduced Hong Kong's debt grade by one level on Wednesday, citing the risk of contagion from the mainland, which is grappling with a record debt burden and an outlook for slower growth.
Moody's downgraded the city's long-term credit rating to Aa2 from Aa1. It cited Hong Kong's "close and tightening economic, financial and political linkages with the mainland", which meant credit trends in China matter for the city.
Closer financial ties "risk introducing more direct contagion channels between China's and Hong Kong's financial markets", it said.
Though Moody's stressed that asset quality at the city's lenders is high, the cut adds to the challenges the territory faces.
"If you were looking at Hong Kong purely in isolation, you probably wouldn't downgrade it," said Union Bancaire Privee's Mark McFarland. "But if you're thinking of Hong Kong as part of a financial system in the Chinese geographical space, the reasons for downgrading China would also apply to Hong Kong, given their close links."
Moody's zeroed in on China's hefty borrowing, which has surged to more than double the gross domestic product since the global financial crisis, in cutting the country's rating. The move was called "illogical" by researcher Mei Xinyu at China's Commerce Ministry in an editorial in the People's Daily newspaper yesterday. China's Finance Ministry also said the downgrade overestimated the risks to the economy and was based on "inappropriate methodology".
While Chinese stocks spiked lower on Wednesday's downgrade - before rebounding amid speculation of intervention - equities in Hong Kong shrugged off the news, keeping to a trend that has made the city's stocks among the best performers in Asia this year.
The Hong Kong government also dismissed Moody's decision, with Financial Secretary Paul Chan "strongly disagreeing" with Moody's decision.
Moody's rationale does raise the possibility that the cycle of downgrades will spread further,said Natixis chief economist Alicia Garcia Herrero. "When push comes to shove, even the Taiwanese sovereign could be downgraded as its economy is heavily reliant on the mainland."