Hong Kong's reputation as a global business hub was dealt a fresh blow Monday after Moody’s downgraded a key rating, blaming a lack of government response to months of popular protests and China’s increased influence over the city’s institutions.
The rating downgrade is a major blow to Hong Kong’s pro-Beijing leader Carrie Lam, who has struggled to end more than seven months of huge and often violent pro-democracy protests.
It also reflects growing concern within the business community that the institutional features that give Hong Kong more political and economic autonomy are weakening under pressure from the authoritarian mainland.
In a statement explaining its decision to downgrade the long-term issuer and senior unsecured ratings one notch to Aa3, Moody’s delivered a blunt assessment of the government’s response to the protests.
“The absence of tangible plans to address either the political or economic and social concerns of the Hong Kong population that have come to the fore in the past nine months may reflect weaker inherent institutional capacity than Moody’s had previously assessed,” the New York-based credit rating agency said.
It described the government’s response to demands for greater political freedoms – and sky-high living costs – as “notably slow, tentative and inconclusive”.
“It may also point to more significant constraints on the autonomy of Hong Kong’s institutions than previously thought,” the agency added, in a nod to pressure from Beijing.
Months of political unrest has upended Hong Kong’s reputation for stability while the protests present the most severe challenge to Beijing’s rule since the former British colony’s 1997 handover to China.
Millions of pro-democracy supporters have taken to Hong Kong’s streets with clashes between hardcore protesters and police frequently breaking out.
Combined with the fallout of the US-China trade war, the protests have slammed the tourist and retail sectors and helped tip Hong Kong into a recession.
The protests were initially sparked by a proposed law allowing extraditions to the authoritarian mainland where the opaque judicial system answers to the Communist Party.
Opponents saw it as the latest move by Beijing to chip away at the city’s unique freedoms, such as its independent judicial system.
But as Beijing and Lam dug in, the movement morphed into a broader campaign calling for democratic reforms and police accountability.
The extradition law was eventually abandoned, but Beijing has refused further concessions and thrown its full support behind Lam.
Among the key demands of the movement are an inquiry into the police, an amnesty for the thousands arrested and fully free elections.
Moody’s decision comes four months after Fitch downgraded the city’s sovereign rating, citing ongoing protests and uncertainty caused by closer integration with the Chinese mainland.
It was the first time the agency had downgraded Hong Kong since 1995 when fears about the city’s future following its handover to China were at their peak.
Moody’s changed Hong Kong’s outlook from stable to negative in September after Fitch’s move but did not follow suit on a ratings downgrade.
It the statement announcing Monday’s downgrade, Moody’s moved Hong Kong’s outlook back to stable, noting the city’s large fiscal reserves, minimal debt burden and ample foreign exchange reserves.
But it warned “closer institutional integration between Hong Kong and China” could contribute to further downgrades in the future.