Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

After China, it's Hong Kong's turn to take Moody's Investors Service to task.

The city's financial secretary wrote a blog post on Sunday to express his displeasure with the recent one-notch cut in Hong Kong's sovereign rating to Aa2

More than the downgrade, what seems to have really irked Paul Chan are the 16 references to "links" and "linkages;" four mentions of "connect" and "connects;" one occurrence of "interdependence;" and as many as 13 allusions to "close," "closer," "tight" and "tightening" in Moody's press release. Those words, which the rating company used to characterize the city's relationship with China, must have grated all the more because Moody's pared Hong Kong's rating hours after it downgraded China for the first time since 1989.

In his post, Chan wanted to know why the rating company is punishing Hong Kong. After all, the rest of the world, too, is scrambling to align with the People's Republic. 

The secretary's right on one point -- Moody's evidence is indeed shallow, especially on potential risks to Hong Kong's banking system from lending more to China. These advances, as Chan argues, are mainly to large Chinese state-owned corporations and multinationals, and are stuffed with collateral. Moody's itself acknowledges that nonperforming China loans -- substandard, doubtful and goners -- are 0.8 percent of the total for Hong Kong banks.

A more persuasive case could have been made about money flowing the other way. Thanks to overabundant Chinese liquidity, Hong Kong's home prices are now stretching the limits of both affordability and credulity. Unlike Singapore, which has managed to rein in runaway speculation, the Hong Kong Monetary Authority's many efforts at cooling the market have gone nowhere. With shadow lenders stepping into the breach, even the recent move to tighten the screws on bank mortgages may not work.

Home Is Where the Risk Is
Hong Kong's residential property prices have almost tripled since December 2008
Source: Centaline Property Agency Ltd.

Still, it's debatable whether the risks from an overheated property market are any higher in Hong Kong than in Australia, which is scored at the highest level by all three main rating companies. The Moody's downgrade, which puts Hong Kong two rungs below the city's AAA rating from S&P Global, does appear a trifle harsh.

A Little Riskier
it costs $17,000 more to buy insurance against default on $10 million of Hong Kong government notes than on higher-rated Australian sovereign debt, but the gap is narrowing
Source: Bloomberg
*Five-year credit default swap spreads; one basis point equals $1,000 to insure $10 million of debt. **Moody's cut its Hong Kong rating to AA2 from AA1 on May 24.

At the same time, Hong Kong's rebuttal is not without holes. Chan's blog post chose to ignore Moody's assessment that the city's institutional strengths, a key reason to rate its debt higher than the mainland's, could converge with China's -- a polite way of saying "weaken considerably" -- in the latter phase of the 50-year period envisaged for the One Country, Two Systems policy. 

Chan is understandably coy to argue that Hong Kong's exceptionalism is guaranteed. It's hard to bang the table on that point when the No. 3 state leader has just warned the city not to confront the central government over the "high degree of autonomy" it was promised when Britain handed the former colony back to China two decades ago.

Mind the Gap
Hong Kong's liquidity glut is causing interbank rates to fall, widening the gap with U.S. rates and putting downward pressure on the city's pegged currency
Source: Bloomberg

The year 2047 is still far away. A more clear and present danger is from excess mainland liquidity. If a growing gap between Hong Kong and U.S. interest rates leads the city to jettison its currency's 34-year-old link to the greenback and seek a more sustainable peg with the yuan, that will be one "tight" and "tightening" embrace of China that could deserve a downgrade. Or two.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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Matthew Brooker at