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Moody's changes outlook on Hong Kong's rating from stable to negative

It says decision signals rising concern over shift in HK's economic-legal equilibrium with China

Hong Kong

CREDIT rating agency Moody's changed its outlook on Hong Kong's rating to negative from stable on Monday, reflecting what it called the rising risk of "an erosion in the strength of Hong Kong's institutions" amid the city's ongoing protests.

The move follows Fitch Ratings' downgrade earlier this month on Hong Kong's long-term foreign-currency-issuer default rating to "AA" from "AA+".

"Moody's has previously noted that a downgrade could be triggered by a shift in the current equilibrium between the SAR's (Special Administrative Region's) economic proximity to and legal and regulatory distance from China," Moody's said in a statement.

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"The decision to change Hong Kong's outlook to negative signals rising concern that this shift is happening, notwithstanding recent moves by Hong Kong's government to accommodate some of the demonstrators' demands." The institutional features that grant Hong Kong greater political and economic autonomy - together with the city's intrinsic credit strengths - accounted for Hong Kong's higher rating than China, the agency said.

Hong Kong's leader, Carrie Lam, told a group of businessmen in late August that her "political room for manoeuvring is very, very, very limited", because the unrest has become a national security and sovereignty issue for China.

The longer the standoff continues, the greater the risk that Hong Kong's attractiveness as a global economic and financial centre would be diminished, Moody's said. Dwindling capacity for the government to implement certain policies could "undermine key drivers of its competitiveness and macroeconomic stability". Moody's affirmed Hong Kong's Aa2 rating, however, citing "strong fiscal and external buffers, with a minimal government debt burden, large fiscal reserves and ample foreign exchange reserves".

It said it would "likely downgrade Hong Kong's rating" if it concluded that the protests, or measures taken by the Hong Kong government to resolve them, were likely to damage its medium-term economic prospects, or "signify an erosion in the predictability and effectiveness of its governing, judicial and policymaking institutions".

Gary Ng, an economist at Natixis in Hong Kong, said the rating action by the rating agencies was an early indicator and warning signal. "I don't think there will be aggressive markets in the short run. The impact will come in the medium term. Some quasi-government agencies may need to pay higher funding costs should the third credit rating agency (S&P) downgrade Hong Kong." The Hong Kong dollar was little changed at 7.8201 per US dollar. The currency is pegged to the dollar at a tight range of 7.75-7.85.

Hong Kong's businesses and metro stations reopened as usual on Monday after a chaotic Sunday when police fired water cannon, tear gas and rubber bullets at protesters who blocked roads and threw petrol bombs outside government headquarters.

On Sunday what began as a mostly peaceful protest earlier in the day spiralled into violence in some of the Chinese territory's busiest shopping and tourist districts.

Dozens of university students rallied peacefully on Monday afternoon urging the authorities to listen to public demands. Police on Monday said 89 people were arrested over the weekend after "radical protesters" attacked two police officers on Sunday evening, hurling petrol bombs, bricks, and threatening the safety of the officers. Nearly 1,500 people have been arrested since the protests started in June.

The authorities moved quickly to douse the fires and police fired volleys of tear gas to disperse protesters, including in the bustling shopping and tourist district of Causeway Bay.

At least 18 people were injured, three of them seriously, during Sunday's violence, according to the Hospital Authority. REUTERS