Hong Kong corporates and banks could be downgraded next

Moody's rationale for the sovereign downgrade could also be applied to them.

According to Natixis, whilst markets continue to shrug off Moody’s downgrades (not only in the Mainland but even Hong Kong stock exchange), the rating agency continues with its clean-up work, slowly but steadily.

Here's more from Natixis:

The latest casualty – Hong Kong – has seen its rating lowered by one notch to Aa2 from Aa1, following the downgrades of China’s sovereign inner circle, namely 26 state-owned enterprises (but no governmentowned Chinese banks involved). One could argue that China’s private sector is also heavily interconnected with the government, so that it could be downgraded at least as much as the sovereign.

As for Hong Kong, Moody’s key reason for the downgrade is simply its ties with the Mainland. No account seems to have been taken on Hong Kong’s massive international reserves (US$396bn) and sound fiscal condition, let alone the government’s close-to-nil foreign debt (US$2.4bn).

On that basis, Moody’s rationale for downgrade (i.e., dependence on the Mainland) is likely to be applied soon to some Hong Kong’s corporates, the more so the more dependent on China.

In many occasions, such link is not only indirect (as for the Hong Kong government) but direct, through investments in the Mainland - with the real estate sector being clearly one of the many examples. Hong Kong banks themselves also suffer from a direct exposure through crossborder lending, which for some is quite massive. This argument could even be made for HSBC and Standard Chartered Bank, whose revenues are heavily concentrated in Greater China.

When push comes to shelf, even the Taiwanese sovereign could be downgraded as its economy is still heavily reliant on the Mainland in terms of exports, investment and even tourism. This is, however, a longer shot both based on past experience (Moody’s did not lower Taiwan’s outlook to negative after China and Hong Kong’s outlook downgrade back in March 2016) but also on Taiwan’s government strong will to diversify away from China.