Why S&P rates Hong Kong three notches above China

HONG KONG – In announcing its decision to downgrade the outlook for Hong Kong’s economy, in line with its decision on China, Standard & Poor’s makes the point that it rates Hong Kong three notches higher than its sovereign (China) for several reasons.

“We think that Hong Kong's institutions and policies support an open and free economy with a generally predictable and effective policy framework and strong economic transparency,” S&P says.

“We believe that this favourable assessment is valid compared with the other governments (numbering close to 130) that we rate under our sovereign criteria.

“Although( Hong Kong’s) the Legislative Council rejected the Chief Executive Election Reform Proposal in June for the 2017 ballot, we believe relations between (China’s) Central Government and (the HKSAR) will remain constructive - as they have been since the handover to China in 1997 - because a stable and prosperous Hong Kong advances China's reform agenda.

“The ratings on Hong Kong also reflect above-average economic growth prospects for a high-income economy, healthy fiscal performance, sizeable fiscal reserves, a strong external position, and the credibility of monetary policy, notwithstanding the inherent limitations of a pegged exchange rate regime in carrying out independent monetary policy.

“That said, we do not believe that the credit standing of Hong Kong can be completely disconnected from that of the Mainland, given financial and economic linkages, and the ultimate sovereign authority of China.”

S&P estimates Hong Kong's 2016 GDP per capita to be about US$44,500. “We believe Hong Kong's economy is likely to grow faster than the average of high-income economies over the next three years,” S&P says.

This forecast assumes resilient local demand, a gradual recovery in advanced economies, and China maintaining economic growth close to 6% annually. In particular, the HKSAR's role in facilitating China's economic and financial integration with the rest of the world should continue to support Hong Kong's financial sector, an important growth engine of its economy.”

S&P says it might lower its rating on Hong Kong without a downgrade of
China if Hong Kong's political polarisation worsens to a point where, in S&P’s view, it compromises policymaking and the business environment.

“In such a scenario - which is not our base case - we would expect a gradual deterioration of the HKSAR's above-average growth, healthy fiscal reserves, and strong external position.” www.standardandpoors.com (ATI).