NEW YORK -- Fitch Ratings has downgraded Hong Kong, the latest sign that political instability and the city's gradual integration into mainland China are eroding global confidence in the financial hub.
The credit-rating agency lowered Hong Kong's long-term foreign-currency issuer default rating to AA from AA+ on Friday local time -- the city's first downgrade by Fitch since 1995, nearly two years before the handover to China. The outlook on the rating is negative.
Hong Kong's growing linkages with the mainland imply "greater institutional and regulatory challenges over time," Fitch said. Months of protests in the city have dealt "long-lasting" damage to the international image of its governance system and rule of law, calling the stability of its business environment into question, the agency explained.
Fitch said the change in Hong Kong's rating is "consistent with a narrowing of the sovereign rating differential between Hong Kong and mainland China." The mainland is rated A+ with a stable outlook.
Hong Kong Chief Executive Carrie Lam expressed disagreement with the rating, saying the "one country, two systems" principle remains intact, local public broadcaster RTHK reported.
The Hong Kong protests took off in June over a controversial extradition bill widely perceived as a gateway to interference from Beijing but evolved into wider demonstrations for democratic causes, punctuated by violence. Lam this week announced the bill's formal withdrawal, but the unrest continues. Even with concessions to some protester demands, "a degree of public discontent is likely to persist," Fitch said.
The downgrade by Fitch -- the first by one of the three main ratings agencies -- deals another blow to the city following other protest-linked developments in the business sphere, with Cathay Pacific Airways' CEO and chairman separately announcing their resignations amid political pressure and Alibaba Group Holding reportedly delaying its second listing, in Hong Kong.
Fitch also forecast that Hong Kong's real gross domestic product will stay flat in 2019, contracting in the second half.