Fitch Ratings, the international issuer and bond rating agency, raised Hong Kong's debt rating to its second-highest ranking, citing the city's fiscal strength and ability to weather external shocks with reserves.

Hong Kong's long-term international debt rating was lifted to AA+ from AA, with a stable outlook, Fitch said in a statement Thursday. The long-term local debt rating was kept at AA+.

The strong growth in Hong Kong's economy and the government's "prudent fiscal management" were the reasons for the upgrade, the ratings agency said.

"Hong Kong has withstood the global financial crisis with its strong external financial position, solid public finances, well-regulated and capitalized banking system," Vincent Ho, a Hong Kong-based associate director at Fitch, said in an interview Thursday.

Hong Kong enjoys "some fiscal flexibility" thanks to its large fiscal reserves, which is equivalent to 31 percent of its GDP and about 22 months of government expenditure," Fitch said, noting that the city has a public fiscal debt of "virtually zero".

The rating agency estimated the city's foreign exchange reserves will rise to $300 billion by the end of 2012. Total reserves were $266 billion at the end of September.

A higher credit rating will benefit the city, in principle, in terms of lower financing costs when the government issues bonds.

However, Kelvin Lau, an economist at Standard Chartered, said that the city's bond market is not as developed as the stock market and the foreign currency market. The government has accumulated a large surplus but only started issuing bonds recently, said Lau. He said the brightest part of the bond market in Hong Kong is its offshore yuan bonds, which have seen dramatic developments in the second half of 2010.

According to figures released by the Hong Kong Monetary Authority, the city's de facto central bank, new issuance of government bonds from September 2009 to October 2010 totalled HK$22 billion, with maturities ranging from two-year to 10-year.

Fitch noted that the vulnerability of Hong Kong banks to potential systemic stress has increased though, given the surge in house prices and bank lending to the private sector - respectively forecast to grow at 20 percent and 22 percent in nominal terms for 2010.

This echoes the view of the International Monetary Fund, which said on November 18 that the risks of forming an asset bubble in the city are rising if measures to rein in the housing market were not put in place. One day later, the Hong Kong government announced extra stamp duties on residential flats resold within two years of purchase and raised down payment levels for home mortgages.

Estimating the probability of a bank bail-out by the government in case of an emergency, Fitch said such a liability is constrained given the high share of foreign ownership in Hong Kong banking system. As of the end of 2009, about 90 percent of banking assets are foreign owned.

However, Fitch said the city's financial sector and banking system are well-regulated and strongly-capitalized, offering considerable buffers against any potential shocks.

Bloomberg - China Daily

(HK Edition 11/26/2010 page2)