China's Decision on Universal Suffrage in Hong Kong Is Credit Negative

A resolution issued by China’s National People’s Congress potentially limits the field of candidates for the 2017 election of the Chief Executive of the Hong Kong Special Administrative Region (HKSAR).

Many in Hong Kong believe that this procedure will mean only candidates favored by the central government will be nominated, and that candidates representing the so-called pro-democracy camp will be excluded from elections.

"Although the HKSAR’s fiscal and external financial situations are very strong, limiting immediate credit implications, a prolonged period of political discord in Hong Kong in reaction to the NPC resolution would be credit negative for Hong Kong," writes Steven Hess, Senior Vice President, Moody’s Investors Service, in a Moody's Credit Outlook.

Hess said that opposition to succeeding steps of the government would very likely develop, resulting in continued political discord and, potentially, a prolonged period of demonstrations between now and whenever the legislation is voted on, and possibly beyond that.

"The timing of the government’s introduction of the legislation is still not clear, but it will not be until 2015 at the earliest," notes Hess.

Hess cautions that a prolonged period of demonstrations would likely negatively affect economic growth, indirectly affecting government finance, and confidence and, therefore, capital flows.

"We believe that Hong Kong has strong buffers against such developments, if they were to occur," says Hess.

Hess explains that the HKSAR government has built up its fiscal reserves to a very high level, equivalent to 36% of GDP. These reserves far exceed the very small level of government debt.

Hong Kong also has one of the strongest net international investment positions in the world, with assets abroad exceeding liabilities by an amount equivalent to 280% of GDP at the end of 2013.

"As a result of these strong financial buffers, we believe that the credit implications of the current political situation, while negative, are not yet significant. Over the longer term, however, if the discord persists, diminished confidence could start to erode Hong Kong’s standing as a global financial center, which would be clearly credit negative," says Hess.
 

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