Fitch Downgrades Hong Kong Over China’s Stronger Hand

Fitch Downgrades Hong Kong Over China’s Stronger Hand

Hong Kong’s economy, already damaged by weeks of protests, was dealt a further blow on Friday, when Fitch Ratings downgraded its credit rating on the territory, citing China’s growing influence in the territory’s affairs.

The move will make it more expensive for Hong Kong and many companies closely tied to its fortunes to borrow money. But more broadly, the downgrade signals the growing belief within the financial world that the barriers between Hong Kong and mainland China are weakening, a development that could threaten the city’s longtime status as a global financial hub.

Fitch, which is based in the United States, is the first of the three major credit rating firms to downgrade Hong Kong’s creditworthiness. It is also the first time Fitch has downgraded its rating on Hong Kong since 1995.

The territory’s economy has been slammed since protests began in June, hitting retail and tourism businesses in particular. Many economists now believe Hong Kong is sliding to recession in the second half of this year, a forecast that Fitch echoed on Friday.

But the downgrade was notable for highlighting how Beijing’s increasing encroachment into Hong Kong could threaten investor confidence.

In its statement, Fitch said it made the move because the months of conflict and violence in Hong Kong are testing the “one country, two systems” framework that the city is governed under by China after its handover from Britain in 1997. Under that model, Hong Kong is considered part of China but maintains its own political and legal systems, attributes that are attractive to foreign businesses and financiers. Unlike Hong Kong, the Communist Party controls the courts in China and makes judges pledge loyalty to it.

Beijing’s actions in response to the protests have raised questions about how long the current arrangement can last. Fitch said that Chinese officials are taking “a more public stance on Hong Kong affairs than at any time since the 1997 handover.”

“Fitch expects the ‘one country, two systems’ framework to remain intact, but the gradual rise in Hong Kong’s economic, financial, and sociopolitical linkages with the mainland implies its continued integration into China’s national governance system, which will present greater institutional and regulatory challenges over time,” said the credit rating firm.

Therefore, it said, it should lower its rating to be more in line with that of mainland China’s.

Fitch downgraded Hong Kong’s long-term, foreign-currency-issuer default rating by one notch to AA from AA+. It said the outlook is negative. Fitch has an A+ rating on mainland China, which as of Friday is two notches below Hong Kong.

Carrie Lam, Hong Kong’s chief executive, on Friday criticized the move, saying that the “one country, two systems” model remains intact, according to RTHK, Hong Kong’s public broadcaster.

Chinese officials have also pledged to adhere to the one country, two systems principle.

On Friday, China’s premier, Li Keqiang, told Chancellor Angela Merkel of Germany during her visit to China that the Chinese government would “unswervingly maintain” the one country, two systems model and allow Hong Kong people to rule the territory with “a high degree of autonomy,” RTHK reported. It was the first time a top Chinese official had directly addressed the protests in public since they started.

Clashes between demonstrators and the police have grown increasingly violent. Chinese official propaganda has highlighted the incidents, scaring away mainland tourists. Protesters have demonstrated at Hong Kong’s bustling airport and its efficient subway system, targeting two of the features that have made the city so popular with foreign businesses and visitors.

Global businesses operating in Hong Kong and the mainland have been pressured to align themselves with Beijing over the protests. Cathay Pacific Airways, in particular, has come under intense scrutiny by Chinese officials. Its chairman and chief executive have resigned in the face of Chinese pressure after some of the airline’s workers participated in the demonstrations. China’s state media has urged the Big Four accounting firms — PwC, Deloitte, KPMG and Ernst & Young, now known as EY — to “fire employees found to have the wrong stance on the Hong Kong situation.”

The protests in Hong Kong began in opposition to a proposed law that would allow the city to extradite people accused of crimes to mainland China but have broadened to include demands for universal suffrage and an independent inquiry into police conduct.

On Wednesday, Mrs. Lam, Hong Kong’s top leader, said she would withdraw the extradition bill. But protesters said she would have to meet their other demands to stop the unrest.

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