Moody's downgrades Hong Kong after China ratings cut

HONG KONG (Reuters) - Moody's Investors Service downgraded Hong Kong's local and foreign currency issuer ratings just hours after it cut China's credit ratings for the first time in nearly 30 years. The U.S. ratings agency downgraded Hong Kong's rating to Aa2 from Aa1 and said credit trends in China will continue to have a significant impact on Hong Kong's credit profile due to close economic, financial and political ties with the mainland. Moody's changed Hong Kong's outlook to stable from negative, denoting that the risks to the city's rating are balanced. The move came late on Wednesday and was widely expected after Moody's downgraded China, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise. Moody's said financial ties between Hong Kong and the mainland were becoming deeper through platforms such as the Shanghai-Hong Kong stock connect scheme, the Shenzhen-Hong Kong stock connect scheme and the bond connect which is expected to be launched this year. "While these connects bring benefits including, it is hoped, enhanced liquidity, they also risk introducing more direct contagion channels between China's and Hong Kong's financial markets," Moody's said in a statement. The Hong Kong government criticised the move, saying the Chinese-ruled city was well equipped to deal with any challenges. "Moody's has overlooked the sound economic fundamentals, robust financial regulatory regime, resilient banking sector and strong fiscal position that Hong Kong has," Financial Secretary Paul Chan said in a statement. "These elements will continue to enable the economy to embrace the challenges ahead arising from the changing external environment." (Reporting By Anne Marie Roantree and Donny Kwok; Editing by Eric Meijer)