The initiatives to deepen integration with mainland China that were highlighted in the annual policy address to the legislature by Hong Kong’s Chief Executive Carrie Lam on 25 November underscore the territory’s ongoing efforts to take advantage of the growth and employment opportunities made possible by the mainland’s broadening economic recovery, says Fitch Ratings. However, they will also reinforce the territory’s sensitivity to developments in China’s creditworthiness.
Fitch downgraded Hong Kong’s rating to ‘AA-’, from ‘AA’, in April 2020 and revised the Outlook to Stable from Negative, following an earlier downgrade from ‘AA+’ in September 2019. The economic fallout from the pandemic and earlier anti-government protests played a role. An additional rationale underpinning both revisions was the large and rising financial, economic, and socio-political linkages between the territory and the lower-rated mainland (A+/Stable), which in our view justified a narrowing of the sovereign rating differential – to just one notch at present — between the two economies.
The policy address stressed efforts to pursue further integration between the territory and the mainland, notably through the Greater Bay Area (GBA) initiative. The GBA was launched in 2017 and seeks to foster deeper cooperation among nine cities in China’s Guangdong province and the Special Administrative Regions (SAR) of Hong Kong and Macao. The policy approach may help spur Hong Kong’s economy over time, but it also highlights that its economic development prospects and creditworthiness will become increasingly bound to those of the wider Chinese economy.
We believe the deepening of ties is unlikely to lead to a further alignment of Hong Kong’s and China’s ratings in the near term. However, downward rating pressure could emerge if, during the process of integration, Hong Kong’s high degree of autonomy over key macro-institutional features such as its independently managed currency, fiscal framework, and financial regulation were to be eroded. Fitch currently believes this outcome unlikely.
The chief executive in her address committed to full implementation by year-end of 24 measures previously agreed in principle by the central government and GBA regional authorities. Among other goals, these aim to facilitate Hong Kong residents’ ability to live and work in other GBA cities through various tax concessions, greater recognition of professional qualifications, access to public services, and the ability to buy property. There are also a number of educational and travel initiatives, including efforts to streamline the entry and exit of SAR vehicles to the mainland.
Near-term economic integration initiatives largely prioritise the “northbound” flow of labour and talent. For example, the Hong Kong government will subsidise a youth employment scheme to encourage local enterprises to facilitate employment in mainland GBA cities.
Other GBA initiatives appear aimed at furthering China’s newly branded “dual circulation” strategy, including collaboration between Hong Kong and Shenzhen on innovation and technology research. The chief executive also revealed that Chinese authorities agreed to include qualifying biotechnology companies listed in Hong Kong and firms listed on the Mainland Sci-Tech Innovation Board in the “connect” schemes that permit investment flows between the Hong Kong and mainland securities markets. This could broaden financing options for research-focused companies.
The announcements should put new momentum behind the GBA initiative in Hong Kong after disruptions associated with the pandemic and anti-government protests. Benefits from the programme will take time to assess. Nonetheless, we expect the emphasis on promoting further economic integration with the mainland to underpin the territory’s role as the flagship offshore financing centre for Chinese firms over the medium term. This role has been underscored by robust capital raising by mainland-based firms in Hong Kong this year, despite the recent halting of a planned IPO by Ant Group.
