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Ratings agency Moody’s downgraded the outlook on Hong Kong’s credit rating to negative from stable on Wednesday, following a similar change for China the day before.

The city’s economy was buoyed by China’s post-pandemic reopening but recovery has slowed in the latter half of the year, with the government last month revising full-year growth estimates down to 3.2 percent.

Moody’s said the “principal driver” of Hong Kong’s negative rating outlook was the “tight linkage between the credit profiles” of the finance hub and China. 

“The change in Hong Kong’s rating outlook reflects Moody’s assessment of tight political, institutional, economic and financial linkages between Hong Kong and the mainland,” the agency said in a statement.

This is the first time Hong Kong has lost its “stable” rating outlook since January 2020.

The agency said China’s downside risks would translate to risks for Hong Kong’s own creditworthiness, adding that changes in “institutional and political linkages” were a key element of the city’s risks.

“Following signs of reduced autonomy of Hong Kong’s political and judiciary institutions, notably with the imposition of a National Security Law in 2020 and changes to Hong Kong’s electoral system, Moody’s expects further erosion of the (city’s) autonomy of political, institutional and economic decisions to continue incrementally,” it said.

“This ongoing process is currently reflected in Moody’s assessment of the quality of Hong Kong’s executive and legislative institutions.”

Beijing imposed a sweeping national security law in Hong Kong after the former British colony saw huge and at times violent democracy protests in 2019.

Authorities have since ousted opposition figures from the legislature and set up a “patriots-only” electoral system, which extends down to the local level. 

Moody’s also said the weakening trend growth in mainland China would affect Hong Kong’s economy, including “through more slowly expanding opportunities for Hong Kong as the key regional economic and financial hub.”

“In turn, weaker growth in Hong Kong could erode the government’s fiscal buffers, as support to the economy broadly leads to a rise in public spending,” it added.

AFP has contacted the Hong Kong government for comment.

The agency a day earlier downgraded its outlook for China’s credit rating to negative citing rising debt in the world’s second-largest economy and concerns over its battered property sector.

Beijing’s finance ministry said in response it was “disappointed with Moody’s decision” and that the agency’s concerns about growth prospects and fiscal sustainability were “unnecessary.”
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Ratings agency Moody’s cut its outlook on China’s government credit ratings to negative from stable on Tuesday, in the latest sign of mounting global concern over the impact of surging local government debt and a deepening property crisis on the world’s second-largest economy.

The downgrade reflects growing evidence that authorities will have to provide more financial support for debt-laden local governments and state firms, posing broad risks to China’s fiscal, economic and institutional strength, Moody’s said in a statement.

“The outlook change also reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector,” Moody’s said.

China’s blue-chip stocks slumped to nearly five-year lows on Tuesday amid worries about the country’s growth, with talk of a possible cut by Moody’s denting sentiment during the session, while Hong Kong stocks extended losses. 

China’s major state-owned banks, which had been seen supporting the yuan currency all day, stepped up U.S. dollar selling very forcefully after the Moody’s statement, one source with knowledge of the matter said. The yuan was little changed by late afternoon.

The cost of insuring China’s sovereign debt against a default rose to its highest since mid-November.

“Now the markets are more concerned with the property crisis and weak growth, rather than the immediate sovereign debt risk,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.

The move by Moody’s was the first change on its China view since it cut its rating by one notch to A1 in 2017, also citing expectations of slowing growth and rising debt.

While Moody’s affirmed China’s A1 long-term local and foreign-currency issuer ratings on Tuesday — saying the economy still has a high shock-absorption capacity — it said it expects the country’s annual GDP growth to slow to 4.0% in 2024 and 2025, and to average 3.8% from 2026 to 2030.

Moody’s outlook downgrade comes ahead of the annual agenda-setting Central Economic Work Conference, which is expected around mid-December, with government advisers calling for a steady growth target for 2024 and more stimulus.

Analysts say the A1 rating is high enough in investment-grade territory that a downgrade is unlikely to trigger forced selling by global funds. The other two major rating agencies, Fitch and Standard & Poor’s, rate China A+, which is equivalent to Moody’s. Both have a stable outlook.

China’s Finance Ministry said it was disappointed by Moody’s decision, adding that the economy will maintain its rebound and positive trend. It also said property and local government risks are controllable.

“Moody’s concerns about China’s economic growth prospects, fiscal sustainability and other aspects are unnecessary,” the ministry said. 

Struggling for traction

Most analysts believe China’s growth is on track to hit the government’s target of around 5% this year, but that compares with a COVID-weakened 2022 and activity is highly uneven.

The economy has struggled to mount a strong post-pandemic recovery as the deepening crisis in the housing market, local government debt concerns, slowing global growth and geopolitical tensions have dented momentum.

A flurry of policy support measures have proven only modestly beneficial, raising pressure on authorities to roll out more stimulus.

Analysts widely agree that China’s growth is downshifting from breakneck expansion in the past few decades. Many believe Beijing needs to transform its economic model from an over-reliance on debt-fueled investment to one driven more by consumer demand.

Last week, China’s central bank head Pan Gongsheng pledged to keep monetary policy accommodative to support the economy, but also urged structural reforms to reduce a reliance on infrastructure and property for growth. 

Deeper in debt

After years of over-investment, plummeting returns from land sales, and soaring costs to battle COVID, economists say debt-laden municipalities now represent a major risk to the economy.

Local government debt reached 92 trillion yuan ($12.6 trillion), or 76% of China’s economic output in 2022, up from 62.2% in 2019, according to the latest data from the International Monetary Fund (IMF).

In October, China unveiled a plan to issue 1 trillion yuan ($139.84 billion) in sovereign bonds by the end of the year to help kick-start activity, raising the 2023 budget deficit target to 3.8% of gross domestic product (GDP) from the original 3%.

The central bank has also implemented modest interest rate cuts and pumped more cash into the economy in recent months.

Nevertheless, foreign investors have been sour on China almost all year.

Capital outflows from China rose sharply to $75 billion in September, the biggest monthly figure since 2016, according to Goldman Sachs.

($1 = 7.1430 Chinese yuan renminbi) 
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Stocks slipped on Wall Street Monday ahead of some key reports this week on the job market that might provide more insight into the Federal Reserve’s thinking about interest rates.

The S&P 500 was off 0.9%. The index is coming off its best month in more than a year, and reached its highest level in more than a year on Friday.

The Dow Jones Industrial Average fell 150 points, or 0.4%, to 36,097 as of 11:20 a.m. Eastern. The Nasdaq composite fell 1.5%.

Treasury yields were higher, putting some pressure on stocks. The yield on the 10-year Treasury, which influences mortgage rates, rose to 4.29% from 4.21%. 

Technology companies were among the biggest weights on the market. Microsoft fell 2.6% and Apple fell 1.8%. 

Spotify surged 7% after announcing its third round of layoffs this year. Uber gained 5.6% after the ride-hailing service was named to join the S&P 500 index. 

Alaska Air Group slumped 15.6% after announcing it will buy Hawaiian Airlines in a $1.9 billion deal, a tie-up that would test the Biden administration as it fights consolidation in the airline sector. 

U.S. crude oil prices fell 0.3%. Oil prices have been slipping recently, helping ease pressure on inflation. 

Markets were mixed in Europe and Asia. 

Wall Street is coming off a solid week and a strong November on hopes that inflation is easing enough to allow the Federal Reserve to stop raising interest rates. Investors are also hoping that the economy remains strong enough to avoid a recession. 

Investors will get several key updates on the economy this week, including reports on the services sector and the jobs market. 

The Institute for Supply Management will release its November report on the services sector on Tuesday. The sector is a key component in the U.S. economy and accounts for the majority of the nation’s jobs. The report could provide more insight into consumer spending and the jobs market. 

Wall Street will get several reports this week that focus on the broader employment picture in the U.S. The government will release its October update on job openings on Tuesday and a weekly report on applications for unemployment benefits on Thursday. 

Investors will be closely watching the government’s monthly jobs report for November, which is on Friday. Analysts polled by FactSet expect U.S. employers to have added 175,000 jobs last month. They forecast that the unemployment rate remained steady at 3.9%. 

The labor market has remained strong in the U.S. even as the Fed has raised interest rates sharply in order to fight inflation by slowing the entire economy. Inflation has been falling since the middle of 2022. The central bank paused raising rates after its most recent increase in late July. 

Wall Street expects rates to remain steady into early 2024, when the Fed could begin cutting interest rates back from their highest level in two decades. The Fed’s next decision on rates will follow the close of their next two-day meeting on Dec. 13.
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