The rating service company Standard & Poor’s has downgraded Hong Kong’s sovereign credit outlook from “stable” to “negative”.

The action came after the company downgraded China’s outlook on Thursday, also from stable to negative.

“Our outlook revision on Hong Kong reflects our similar action on the People’s Republic of China on March 31, 2016, which reflected economic imbalances in China that are unlikely to diminish at the pace we previously expected,” the company said in a press release. “In our view, the SAR and China have a high degree of financial and economic linkage.”

Photo: HKFP remix.

Political polarisation

The negative outlook meant that the company would likely lower the rating on Hong Kong by one notch, if it lowered its rating on China.

“In addition, we might lower our rating on Hong Kong without a downgrade of China, if Hong Kong’s political polarization worsens to a point where it compromises policymaking and the business environment.”

“In such a scenario–which is not our base case–we would expect a gradual deterioration of the SAR’s above-average growth, healthy fiscal reserves, and strong external position.”

Political reform bill was voted down in LegCo. Photo: LegCo

Constructive relationship

Hong Kong’s current credit rating stayed at AAA, three notches higher than China, which is at AA-.

“Although the Legislative Council rejected the Chief Executive Election Reform Proposal in June for the 2017 ballot, we believe relations between the central government and its SAR will remain constructive – as they have been since the handover to China in 1997 – because a stable and prosperous Hong Kong advances China’s reform agenda.”

The company said the ratings on Hong Kong also reflect above-average economic growth prospects, although it added that it did not believe that the credit standing of Hong Kong can be completely disconnected from that of the mainland, given the “financial and economic linkages, and the ultimate sovereign authority of China.”