MARC has assigned a foreign currency sovereign rating of ‘AAA’ with a stable outlook to the Hong Kong Special Administrative Region of China (“Hong Kong”) based on the rating agency’s national rating scale. The government of Hong Kong has no debt rated by MARC; the country ceiling applies to ringgit-denominated issuances by entities domiciled in Hong Kong to reflect the transfer and convertibility (T&C) risk in ringgit-denominated debt issuances by foreign issuers. The rating is based solely on an analysis of information in the public domain.

Hong Kong enjoys a strong sovereign credit profile. It has sturdy economic fundamentals, is solid fiscally, has a strong external position, as well as a well-managed resilient financial sector. However, it faces high property market risks, and event risk associated with its substantial exposure to mainland China.

With its integration into the Chinese economy, Hong Kong has become an increasingly important gateway to the world’s largest market. This has helped boost its economic strength, which supports the rating. It has a very open free market economy and is highly competitive.  Economic growth has been resilient compared to some of its high-income counterparts due to sturdy economic fundamentals, and this is expected to remain so going forward. 

The rating is further supported by Hong Kong’s track record on fiscal prudence, which has been impressive. It has no fiscally-related debt, and sustained fiscal discipline has led to a sizeable accumulation of fiscal reserves. The reserves, equivalent to about 35.2% of nominal gross domestic product (GDP), are enough to cover more than 20 months of government expenditure. Hong Kong’s prudent fiscal policies have been important in ensuring that its Linked Exchange Rate (LER) system, which has served it well, remains robust and relevant.

Hong Kong’s strong external position is also a key rating support. Its current account structural surpluses are largely due to its services exports in which it has a strong edge in the region. As a result of current account surpluses accumulated over the years, the level of foreign reserves is high; in 2013, it corresponded to 113.6% of nominal GDP. It is also a net creditor with net external financial assets amounting to 280% of nominal GDP in 2013. Hong Kong is thus well-equipped to face potential external disturbances.

Also underpinning the rating is the resilience of the territory’s financial sector, one of the largest and most developed in the world. The banking system is highly capitalized, profitable, and liquid; for example, total capital adequacy ratio as at end-March 2014 was high at a robust 15.9%. Stress tests conducted by the International Monetary Fund (IMF) concluded that the banking sector is resilient, and unlikely to suffer from aggregate capital shortfall over a five-year forecast horizon in the event of a severe economic shock.

The rating also takes into account Hong Kong’s residential property market, which is a risk factor. There is potential for a combination of factors such as a surge in new supply, cooling measures, and an impending interest rate rise to trigger a painful price correction. Also worrisome is the possibility of a contagion effect coming from China’s sputtering property market. The active deployment of macro-prudential policies that include tighter limits on loan-to-value ratios and debt-servicing ratios have, however, somewhat mitigated systemic risks.

As the level of integration between Hong Kong and China rises, so has Hong Kong’s exposure to the mainland. There are risks associated with adverse developments on the mainland that can significantly impact Hong Kong. On the other hand, any positive development in China will be credit positive for Hong Kong. As China has drawn great benefits from Hong Kong’s unique status, MARC does not foresee the pro-democracy protests jeopardising Hong Kong’s economic and financial future, as well as its role as gateway into China over the medium term.

The stable outlook reflects MARC’s assumption of a soft-landing for the Chinese economy. It also reflects expectations of continued mainland Chinese commitment to ensuring Hong Kong’s peaceful and stable development. MARC also assumes that the ongoing broad assault against corruption in mainland China, which suggests that Beijing is committed to improving governance, will continue. This will be a positive development for Hong Kong as it implies continued effective policymaking and implementation in Hong Kong going forward.

Contacts:
Quah Boon Huat, +603-2082 2231/ boonhuat@marc.com.my;
Afiq Akmal Mohamad, +603-2082 2274/ afiq@marc.com.my;
Nor Zahidi Alias, +603-2082 2277/ zahidi@marc.com.my.