Bank of China, Hong Kong, local government financing vehicle

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  • Moody’s Investors Service cut its outlook for eight Chinese banks to negative from stable.
  • This comes a day after China downgraded its credit rating.
  • The rating agency also downgraded Hong Kong’s outlook to negative from stable, citing its ties to mainland China.
  • Moody’s also downgraded its outlook for 22 Chinese local government financing vehicles.

A pedestrian walks past a branch of the Industrial and Commercial Bank of China (ICBC) in Fuzhou, China’s Fujian province.

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Moody’s Investors Service on Wednesday cut its outlook for eight Chinese banks to negative from stable, following a similar downgrade of China’s sovereign credit ratings a day earlier.,

The rating agency downgraded Hong Kong’s outlook to negative from stable, citing tight political, institutional, economic and financial ties between Hong Kong and mainland China.

The lenders whose ratings were downgraded include the Big Four Chinese lenders, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank Corporation.

“Given the change in the sovereign rating outlook, the change in the outlook for these banks from stable to negative is directly driven by a potential deterioration in central government ratings or credit quality,” Moody’s said.

Moody’s on Tuesday cut its outlook for China’s sovereign credit rating to negative from stable, as it expects Beijing’s support and potential bailouts for troubled local governments and state-owned enterprises to boost China’s fiscal, economic and financial stability. And institutional strength will be reduced.

Other banks on the list were China Development Bank, Agricultural Development Bank of China, Export-Import Bank of China and Postal Savings Bank of China Company.

The downgrade highlights concerns over China’s rising debt levels and its impact on GDP growth in the world’s second-largest economy.

Moody’s cut its outlook for 22 Chinese local government financing vehicles to negative from stable.

LGFVs are companies set up by local governments to invest in infrastructure and social-welfare projects.

The rating agency said the LGFV downgrade was primarily the result of changing the outlook for China’s sovereign credit rating from stable to negative. They were driven by low medium-term economic growth and rising risks due to the ongoing crisis in the property sector.

“These trends highlight increasing risks related to policy effectiveness, including the need to design and implement policies that support economic rebalancing while preventing moral hazard and impact on sovereign balance sheets,” Moody’s said in a statement. There is a challenge involved.”

Moody’s blames Hong Kong’s close ties with mainland China for downgrade, “Given the close relationship implicit in the ‘one country, two systems’ policy; in the economy, given the very strong trade ties between the two; and in the financial system, given the involvement and role of Hong Kong’s banking system in the mainland Conduit for finance flows into regional and global financial systems.”

“I don’t think this is a fair downgrade of our economic outlook. In fact, in terms of our financial system, our resilience, our economic resilience, we have a very strong buffer… and economic growth this year is about 3.2%,” Hong Kong’s Financial Secretary Paul Chan told CNBC’s “Capital Connection” on Thursday.

Chan remained optimistic about Hong Kong’s economic resilience and noted three drivers of growth: exports of services, capital investment, and consumption or registering positive growth. He said that things are still challenging externally, so exports will continue to decline slightly in the future.

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