HONG KONG (BLOOMBERG) - Hong Kong Financial Secretary John Tsang defended the city's economy after Moody's Investors Services cut the city's long-term debt outlook because of its links to China.
Moody's maintained Hong Kong's long-term debt and issuer ratings at Aa1 while downgrading outlook to negative from stable because it sees the city's credit profile tracking China's, according to an e-mailed statement from the agency.
The firm lowered China's credit-rating outlook on Mar 2 as a rising debt burden, falling foreign-exchange reserves and uncertainty about authorities' capacity to implement reforms weigh on its economy.
"While Moody's has changed the rating outlook for Hong Kong to negative from stable, it continues to recognize Hong Kong's credit strengths and strong economic fundamentals," Mr Tsang said in an e-mailed statement.
"Hong Kong is in a good position to benefit from the structural re-balancing in the mainland's economy from investment to consumption."
Hong Kong's economy, dependent on China trade, may see "muted" growth over the next five years with a possible increase in its banking sector's credit risk given its exposure to corporations in the world's second-largest economy, Moody's said.
Chinese Premier Li Keqiang announced a 6.5 per cent to 7 per cent expansion goal last week, down from an objective of about 7 per cent last year and the first range the government has offered since 1995.
The nation has been burning through foreign reserves to defend the yuan, depleting the stockpile by US$513 billion last year, the first annual decline in more than two decades, at a time where debt levels have climbed to an unprecedented 247 per cent of gross domestic product.
"The credit quality of the mainland borrowers is high, given the majority of them are large state-owned enterprises and multinational companies," Mr Tsang said, referring to Chinese borrowers in Hong Kong. "Risk associated with mainland-related lending is manageable."
Moody's also warned that unfavourable developments in China could lead to a sharp correction in Hong Kong's elevated level of property prices, exacerbating the pressure on banks' asset quality and profitability.
"Banks in Hong Kong have a strong capital base, and they have prudently managed their property-related exposures," Mr Tsang said. "Following the implementation of seven rounds of countercyclical and macro-prudential measures by the Hong Kong Monetary Authority over the past few years, the banking sector is now more resilient in weathering property market adjustments."
The rating agency said the strong political link embedded in the one country, two systems policy creates the risk that Hong Kong's institutions will lose some independence over time as China grows.
Ahead of the 2017 election for Hong Kong's chief executive, tensions could rise further and impair the effectiveness of government policies, the agency said.