After one month of street protests, Fitch Ratings in a recent review reaffirmed Hong Kong’s AA+/stable rating.
“It is important not to over-emphasise the recent protests as a factor in Hong Kong’s credit profile,” the agency said. “The protests have not had a significant impact on the key positive factors underpinning Hong Kong’s ratings.”
Fitch’s report echoes the Hong Kong government’s assessment. While noting some incoveniences such as individual bank branches in some areas temporarily closing, K C Chan, secretary for financial services and the treasury, said in a recent statement that the territory has not been impacted.
“Hong Kong’s financial system, including the banking system, stock market and foreign exchange market, etc, have been functioning in a normal and orderly manner.
“The linked exchange rate system is robust, interest rates remain steady, and there is no evidence of abnormal fund outflow.”
The assessments from Fitch and the government sharply contradict the dire predictions by the Hong Kong entities of the big four accounting firms – Ernst &Young, KPMG, Deloitte and PwC.
In the summer, the big four took out an advertisement in local Chinese language newspapers, warning that the disruption caused by the protests would harm the stock exchange, banks and headquarters of financial and professional services firms.
The protests would cause “inestimable losses in the economy” while over the longterm degrading Hong Kong’s place as an international business centre, the big four said.
Outperforming Singapore
From September 28, when the Occupy Central protests began, to October 31, Hong Kong’s stock market performed better than Singapore’s.
Outperformance was also notable in the past 12 months:
Mainland tourism soars
François Théret, chief investment officer of Absolute Asia Asset Management, believes that the retail industry has taken a hit in the short term, citing data from the Hong Kong Retail Management Association.
He also noted that China stopped group tours to Hong Kong, which in turn impacted retail sales.
However, the Association’s data focused selectively on the Central and Admiralty districts, where the demonstrators have camped out, and only on retail sales during China’s Golden Week holiday from October 1 to 5.
The data is also questionable when looked at beside figures from Hong Kong’s Travel Industry Council, which found a 90 percent year-on-year increase in mainland tourists from October 1 to 22.
In addition, the ban on mainland tourist groups to Hong Kong was short-lived and was never a formal policy, the South China Morning Post reported.
Closer integration
The pro-democracy protests so far have been relatively non-violent. Provided the situation doesn’t worsen, Hong Kong’s standing as the financial hub of Asia ex-Japan is expected to remian untarnished.
“We believe the pro-democracy protests do not undermine this leadership,” said Michael McDonough, emerging markets analyst at Loomis, Sayles & Co.
Théret pointed out that China seems to prefer Hong Kong as a testing ground for internationalisation initiatives, such as the RMB Qualified Foreign Institution Investors programme and the Hong Kong-Shanghai stock connect, set to launch November 17.
“The first-mover advantage has helped Hong Kong secure the rapidly growing source of financial revenues from the offshore yuan business. Hong Kong maintains a comfortable lead over other locations, such as Singapore, London and Frankfurt.”
“Hong Kong’s status as a major global financial market with strong rule of law and increasing cooperation with other international financial hubs is unshakable,” Théret said.
Fitch noted that closer integration with China in the financial sphere is beneficial to Hong Kong, but it also makes the territory increasingly vulnerable to China country risk.
Hong Kong’s broader challenge is dealing with the impact of China’s slowing GDP growth while at the same time following the US lead in tighter monetary policy, the ratings agency said.
“However, the buffers and resources available to Hong Kong to meet these challenges remain considerable, and continue to underpin very high sovereign credit ratings.”
