How Hong Kong's creditworthiness can be threatened by risks in China

'Low' susceptibility to risks, says analyst.

According to Moody's, Hong Kong has a “low” susceptibility to event risk, rather than “very low,” largely because of its status as a region of China. 

Moody's adds, the Basic Law, Hong Kong’s constitutional document, is a law of the National People’s Congress and, in theory, could be revised by that body. In addition to the SAR’s political status, its increasing economic and financial integration with the rest of China make it exposed to developments there.

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The strong economic/financial linkages include, among other things (1) the substantial amount investment by Hong Kong companies in the Mainland, (2) the role of Chinese companies in Hong Kong financial markets, with the majority of the Hong Kong stock exchange’s market value represented by Mainland companies and Bank of China being the second largest bank in the SAR, and (3) the increasing role of the renminbi in Hong Kong.

China is rated Aa3 (with a positive outlook), two notches below Hong Kong. Moody’s nonetheless believes that China risk is something that needs to be considered in assessing Hong Kong’s creditworthiness.

So far, Hong Kong’s status within China has been positive for Hong Kong’s economy and finances, both because of supportive policies at the central government level and the strong performance of China’s economy.

However, any major political or economic event in China could affect the SAR either directly or through investor confidence and capital flows. As Hong Kong has the economic and financial strength to deal with most external shocks, the risk of a shock that would affect the rating is considered low.

As to shocks coming from outside China, such as the recent global financial crisis or the current instability in European financial markets, Hong Kong seems less susceptible than other countries.

Although at the time of the Asian financial crisis there was considerable capital outflow from Hong Kong, there was no banking crisis as in some other Asian countries.

It would seem that the current sovereign debt crisis in Europe will not cause a crisis in Hong Kong, even if it could have some negative effects on growth.