TNAG-2749-FCO40-3964-Economic-situation-in-Hong-Kong-1993 — Page 123

CONFIDENTIAL

HKB 090/1

Hk Economy

011052

MDHIAN 6549

TO IMMEDIATE FCO

CONFIDENTIAL

FM HONG KONG

TELNO 1038

OF 260155Z JUNE 93

AND TO IMMEDIATE PÈKING

RECE

TRY

01 JUL 1993

VER

PA

REGISTRY Action Taken

TOP COPY Q DIST ?

30

MOODY'S SOVEREIGN CREDIT REPORT ON HONG KONG.

SUMMARY.

1.

MOODY'S LATEST REPORT ON HONG KONG'S CREDIT RATING RELEASED THIS WEEK (BY FAX TO YOU AND PEKING SEPARATELY - 13 PAGES), POINTED TO INCREASING POLITICAL TENSION DURING THE RUN-UP TO 1997 AND SUGGESTED THAT IT WILL BE MORE DIFFICULT FOR HONG KONG TO RETAIN ITS ROLE AS FINANCIAL CENTRE' UNLESS CHINA LIMITS ITS SOVEREIGN POWERS OVER, AND INTERVENTIONS IN, HONG KONG.

DETAIL.

1

FOLLOWING THE 4 JUNE 1989 INCIDENT IN CHINA, MOODY'S LOWERED IN NOVEMBER 1989 THE RATING CEILING FOR FOREIGN-CURRENCY DENOMINATED SECURITIES ISSUED BY HONG KONG ENTITIES FROM A2 BY ONE

NOTCH TO A3.

2.

THE LATEST CREDIT REPORT MAINTAINS HONG KONG'S RATINGS AT A3 FOR FOREIGN CURRENCY LONG-TERM BONDS AND NOTES AND P-1 FOR FOREIGN CURRENCY SHORT-TERM DEBT.

3.

4.

-

IN THE 'MEDIUM- AND LONG-TERM OUTLOOK' SECTION OF THE REPORT (PAGES 4-5), MOODY'S NOTE THAT THERE ARE BROADLY THREE BASIC SCENARIOS FOR THE FUTURE OF HONG KONG. IN THE FIRST, 'CHINA COULD MAINTAIN A TRULY HANDS-OFF APPROACH WITH HONG KONG ESSENTIALLY ALLOWING THE PRESENT SITUATION TO CONTINUE, BUT UNDER A DIFFERENT RULER'. IN THE SECOND, 'CHINA IS LIKELY TO BROADLY RESPECT THE FRAMEWORK SET BY THE BASIC LAW, BUT IT IS ALSO LIKELY TO INTERVENE MORE FREQUENTLY IN THE AFFAIRS OF HONG KONG, AND WITH LESS REGARD FOR THE PRACTICES OF COMPETITIVE MARKETS'. HONG KONG MAY WELL RETAIN A SPECIAL ROLE AS FINANCIAL AND ECONOMIC CENTRE FOR THE REGION, ALTHOUGH WITH A REDUCED INTERNATIONAL PROFILE'. IN THE THIRD, 'CHINA FALLS IN POLITICAL OR ECONOMIC DISARRAY, AND DRAGS HONG KONG INTO ITS OWN CRISIS

AND BE FULLY ABSORBED INTO

CHINA'.

PAGE

1

CONFIDENTIAL