HONG KONG SPECIAL ADMINISTRATIVE REGION OF CHINA - 2017

MARC has affirmed Hong Kong Special Administrative Region of China’s (Hong Kong) foreign currency sovereign rating of AAA with a stable outlook based on MARC’s national rating scale. The rating reflects MARC’s opinion of the sovereign’s ability to meet its foreign currency obligations in full and on time, without respect to specific securities or payment obligations. The rating also serves as a country ceiling for ringgit-denominated debt issued locally by issuers domiciled in Hong Kong. Transfer and convertibility (T&C) risks are reflected in the country ceiling. The analysis is based solely on information available in the public domain. The government of Hong Kong has no debt rated by MARC.

The rating is underpinned by its resilient and competitive economy. Hong Kong is a relatively rich country with a per capita (in purchasing power parity (PPP) terms) gross domestic product (GDP) of 58,553 international dollars (2016). Its economic integration into China has seen it transforming itself into a very open and competitive service-based economy. In 2017, the IMD World Competitiveness Center ranked it the world’s most competitive out of 63 economies covered, for the second year in a row. Hong Kong has a strong track record of policy effectiveness, transparency and flexibility of economic and fiscal policy, which should continue to keep the economy resilient and competitive.

Hong Kong’s strong fiscal position, due to an impressive track record on fiscal prudence, is a key rating support. This is a particularly important point because fiscal policy is its main demand management tool. For the fiscal year ending March 2017, the government’s consolidated surplus came in at an equivalent of 4.4% of GDP. Hong Kong has considerable fiscal reserves (end-March 2017: 37.7% of GDP) that it can draw down on to stabilise the economy during downturns. As expected from its strong fiscal performance, Hong Kong has no fiscal-related debt. It has, however, issued HKD-denominated debt instruments for banking sector liquidity management and local bond market development. Government debt and government-guaranteed debt at end-FY2016/17 stood at 0.1% and 1.1% of GDP, respectively.

Another rating support is its strong external position. Hong Kong’s external balances remain strong, despite its current account (CA) surplus narrowing in recent years. This narrowing in the post-Global Financial Crisis (GFC) period is not due to a loss of competitiveness, but rather due to Hong Kong’s trade structure adapting to China’s trade patterns and capital account liberalisation, as well as changes in offshore merchandise trade activities. Hong Kong is a net creditor, with its net international investment position (NIIP) estimated to have reached a robust 380% of GDP (end-June 2017). This, together with a large fiscal buffer, should enable Hong Kong to ride out negative shocks going forward.

The rating takes into consideration Hong Kong’s high property market risk. While the outlook remains highly uncertain, the demand for properties over the short term will likely continue to be supported by low interest rates, a perceived housing shortage, and aggressive promotion and financing plans. In 2Q2017, the housing price-to-income ratio reached 16.6 (1997 peak: 14.6), while the income-gearing ratio registered 75.5%, significantly above the long-term average of about 50%. The household debt-to-GDP ratio also climbed higher in 2Q2017 to 68.3%. Driven by fast household loans growth, residential mortgages make up around two-thirds. With central banks worldwide moving away from economic stimulus, there are concerns about potential impacts on global housing prices.

Hong Kong’s rating strengths are also tempered by its increasingly high exposure to mainland China – be it political, economic or financial. Many see civil servant Carrie Lam’s election as the next Chief Executive in March by a largely pro-Beijing and pro-establishment election committee as proof of Beijing’s interference in domestic politics. This has led to worsening political polarisation, with potentially adverse implications for policymaking. On the economic front, GDP growth pace is no longer as robust as in the pre-GFC period for several reasons, the most important being China’s slower growth pace. Meanwhile, the growing share of Hong Kong banks’ mainland-related lending continues to raise concerns given the rising credit-to-GDP ratio and corporate sector leverage in China.

The stable rating outlook reflects MARC’s expectations that the Hong Kong economy will remain resilient and competitive because of its strong fiscal and external positions, as well as governance and institutions. We do not foresee its substantial financial buffers to experience any sudden and significant deterioration. We also assume that: a) China’s economic rebalancing continues in an orderly manner; b) the United States’ (US) monetary policy normalisation proceeds at a gradual pace; and c) geopolitical developments in the Korean peninsula do not lead to military conflict.

Major Rating Factors

Strengths

• Resilient and competitive economy;
• Strong fiscal position; and
• Strong external position.

Challenges/Risks

• Property market risk; and
• Exposure to China.