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Boston, MA -- (SBWire) -- 11/20/2013 --In spite of the strong fundamentals backing Hong Kong's banks, the sector is facing growing risks from not just a general slowdown in its domestic economy, but also from a growing exposure to borrowers in China. On top of an increasing possibility of a property correction coming earlier than expected, the support from financial services also appears to be diminishing. Also, Hong Kong banks' claims on banking entities on the mainland, which previously had the implicit guarantee of the government, are now at risk from Beijing's endeavour for financial reform.

Recent reports of the growing use of the Chinese yuan in the global foreign exchange market have again reignited discussions calling for a repeg of the Hong Kong dollar to the yuan, instead of the US dollar. Until we see the Chinese yuan become a fully convertible currency, there is little chance that the Hong Kong dollar will be repegged to the Chinese currency.

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The government appears on track to miss its land release target for FY2013/14, which suggests that the city's housing shortage will not be alleviated anytime soon. This is likely to translate into smaller property-related revenue collections for the government. On the expenditure front, the government may use the results from a recently commissioned report on poverty to bolster its intent to raise social welfare expenditure and possibly raise the minimum wage. Despite these developments, the government's proven record for maintaining fiscal discipline, even in times of economic stress, suggests to us that the structural changes to the city's welfare expenditure are unlikely to materially affect Hong Kong's rock-solid fiscal health.

The city's political landscape has become increasingly fractious over the past year as support for Chief Executive Leung Chun-ying from both the public and within the government continues to flounder.

Although we have yet to see the political deterioration adversely impact the running of Hong Kong's economy, we highlight that the risk of an economic fallout is on the rise. Also, as China starts to speed up development of its inland infrastructure and its ports start to pose greater competition to Hong Kong, the city may start to see a diminished role within the global supply chain.

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