S&P strips Hong Kong of AAA rating after China downgrade

People walk along a promenade before the city skyline in Hong Kong.
People walk along a promenade before the city skyline in Hong Kong. PHOTO: AFP

HONG KONG (BLOOMBERG) - S&P Global Ratings cut Hong Kong's credit rating, a day after it downgraded China for the first time since 1999, a move that reflects the "strong institutional and political linkages" between the Special Administrative Region (SAR) and the mainland, the ratings firm said.

The financial hub's long-term issuer credit rating was lowered to AA+ from AAA, S&P said in a statement on Friday (Sept 22). The agency lowered China's sovereign rating on Thursday to A+ from AA-, citing the risks from soaring debt, and revised its outlook to stable from negative.

"We are lowering the rating on Hong Kong to reflect potential spillover risks to the SAR should deleveraging in China prove to be more disruptive than we currently expect," S&P said in a statement, referring to the Hong Kong Special Administrative Region.

It is the second time this year Hong Kong's rating has been cut in response to a China downgrade.

Moody's Investors Service in May lowered the finance hub's rating and changed the outlook to stable from negative after it cut China for the first time since 1989.

"Downgrading Hong Kong after China is a natural step," said Mark McFarland, chief Asia economist at Union Bancaire Privee. "It has been widely anticipated that S&P would eventually follow the others and that Hong Kong would be dropped a notch too."

While S&P said Hong Kong's credit metrics remain "very strong" based on the strength of the central government in Beijing, it faces a slew of challenges from surging property prices to the Federal Reserve's plans to raise interest rates. Because the former British colony's currency is pegged to the dollar, it effectively imports US monetary policy.

Analysts remain concerned with China's swelling debt. Total borrowing climbed to about 260 per cent of the economy's size by the end of 2016, up from 162 per cent in 2008, according to Bloomberg Intelligence estimates.

S&P's China downgrade represents waning confidence that Beijing can strike a balance between maintaining economic growth and cleaning up its financial sector. The move may also be uncomfortable for Communist Party officials, who are just weeks away from their twice-a-decade leadership reshuffle.