Hong Kong Protests: Fitch Downgrades Territory's Bond Rating As Weekend Demonstrations Ramp Up

Fitch Ratings downgraded Hong Kong’s bond rating ahead of another weekend of anti-government protests as the territory teetered on the brink of recession.

Fitch late Thursday downgraded Hong Kong’s default rating to AA from AA+. The downgrade was the first since 1995 and also the first since China took control of the territory from Britain in 1997, and brings Hong Kong’s rating in line with the mainland. The move will make it more expensive for businesses in Hong Kong and the government to borrow money.

“Fitch expects the ‘one country, two systems’ framework to remain intact, but the gradual rise in Hong Kong’s economic, financial and socio-political linkages with mainland implies its continued integration into China’s national governance system, which will present greater institutional and regulatory challenges over time,” Fitch said.

The result could be a weakening of Hong Kong’s position as a financial hub even as China pledged Friday to maintain the dual government framework in a meeting between Premier Li Keqiang and German Chancellor Angela Merkel.

Fitch said the ongoing protests have “inflicted long-standing damage to international perceptions” of Hong Kong’s government and put into question the “dynamism of its business environment.”

Anti-government protests were touched off by introduction of a measure that would have allowed those charged with serious crimes to be extradited to the mainland for prosecution. The government withdrew the measure earlier this week but protesters say they have other demands that have yet to be met, including establishment of a commission to investigate police conduct during the sometimes violent protests, many of which have targeted Hong Kong’s airport.

“The negative outlook reflects our view that even with concessions to some protestor demands, a degree of public discontent is likely to persist,” Fitch said. “The potential for renewed eruptions of social unrest could further undermine confidence in public institutions, and tarnish perceptions of Hong Kong's governance, institutions, political stability, and business environment.”

Hong Kong Financial Secretary Paul Chan denied the protests have “affected Hong Kong’s core competitiveness.”

Protesters gathered at multiple sites late Friday to denounce police tactics. Police stormed subway stations to arrest protesters and used rubber bullets, pepper spray and tear gas to quell the demonstrations.