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Rating Action:

Moody's Upgrades Hong Kong's Ratings to Aa1, Assigns Positive Outlook

 The document has been translated in other languages

10 Nov 2010

New York, November 10, 2010 -- Moody's Investors Service has upgraded the government bond ratings of the Hong Kong Special Administrative Region to Aa1 from Aa2. In addition, the foreign currency bank deposit ceiling was raised to Aa1, while the foreign currency bond ceiling was raised to Aaa. The agency also assigned a positive outlook to the ratings.

The main driver for the upgrades and the outlook change was Moody's upgrade of the Chinese government's bond rating to Aa3 and the positive outlook assigned to that rating. Also considered in the decision for Hong Kong were the following factors.

(1) The prospects for continued and improving government financial strength, particularly in comparison to other sovereigns rated in the Aaa and Aa range;

(2) The lessening vulnerability to external shocks, including any from mainland China, as demonstrated by the continued health of the financial sector through the global crisis, the increases in the Special Administrative Region's (SAR's) external financial assets, and the government's own very strong financial position;

(3) Favorable prospects for Chinese economic performance in the coming few years, providing support to economic growth and financial developments in Hong Kong.

RATINGS RATIONALE

Moody's believes that, as a Special Administrative Region of China, Hong Kong's ratings should be linked to, although not necessarily the same as, China's. Unlike other subsovereigns, Hong Kong has a separate currency, international reserves, legal system, and foreign exchange regime. In addition, the central government does not collect taxes in Hong Kong, so there is no fiscal relationship between the two.

On a stand-alone basis, Hong Kong's government financial strength, institutional strength, and economic strength are compatible with a Aaa rating, according to Moody's sovereign rating methodology. However, because of the SAR's legal status as a part of China and because of increasing financial and economic linkages with the rest of China, there is also an element of China risk inherent in Hong Kong's rating. Although China's economic performance has been positive for Hong Kong's economy since the 1997 return to Chinese sovereignty, any negative scenario for China in the future would also have consequences for Hong Kong. Moody's does not believe that such a scenario is likely, as indicated by China's high rating and positive outlook. However, the linkages between Hong Kong and the mainland do influence Hong Kong's rating level.

"Hong Kong's fiscal indicators are among the strongest of the countries and regions rated by Moody's, notwithstanding some revenue volatility," according to Hess. "The global financial crisis affected the government's finances, but the government has maintained a budget surplus despite a decrease in revenues and some increase in spending." Hong Kong's government has only a minimal amount of debt, and the budget is expected to remain in surplus this fiscal year, even though the original budget showed a deficit. Furthermore, the government's large fiscal reserves make it likely that, for the foreseeable future, potential budget deficits can be financed without debt issuance.

Although a number of highly rated countries experienced serious banking-sector difficulties as a result of the recent financial crisis, Hong Kong's banks proved comparatively resilient, and the Hong Kong government, although establishing a temporary facility to provide capital to the banks if needed, was not actually required to use this facility. "In addition, the government's fiscal reserves and the large foreign assets of both the government and the private sector provide Hong Kong with a cushion against potential external shocks," added Moody's Hess. "The prospects for further increases in the SAR's net foreign assets are positive."

Going forward, economic developments in Hong Kong will be influenced by the pace of growth in China. Financial relations between the SAR and the mainland are deepening as Chinese demand for Hong Kong's financial and professional services increases. With the Chinese economy expected to continue to grow rapidly, this demand should expand further over time. In addition, as an intermediary for trade between China and the rest of the world, Hong Kong will continue to benefit from rising trade volumes, even as infrastructure is developed elsewhere in China. The development of the "offshore" market in Hong Kong for renminbi financing may reinforce the SAR's advantage as a center for Chinese international financial transactions.

The principal methodology used in this rating was Sovereign Bond rating methodology published in September 2008.

Moody's last rating action concerning Hong Kong was on October 8, 2010, when the Aa2 government bond ratings were placed on review for possible upgrade.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Financial Institutions Group
Moody's Investors Service Singapore Pte. Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's Upgrades Hong Kong's Ratings to Aa1, Assigns Positive Outlook
No Related Data.
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