Moody\'s Investors Service says the rise in
Hong Kong\'s rating during the 10 years since its handover to China has
been supported by the strengthening of the Special Administrative
Region\'s economic and financial indicators as well as the track record of
non-interference by China\'s central government.

\"Over time, the Chinese government has demonstrated its commitment to
maintain Hong Kong\'s autonomy and to not interfere in the economic or
financial activities of the HKSAR,\" says Steven Hess, a VP/Senior Credit
Officer in Moody\'s sovereign risk unit.

\"Hong Kong\'s creditworthiness is solidly in the Aa range, balancing its
intrinsic financial strength against a degree of risk related to China,\"
says Hess, adding, \"The latter is, however, small, as indicated by
China\'s own relatively high rating.\"

\"Should Hong Kong\'s rating be upgraded this time around, it would be at
least four notches above the A3 rating Hong Kong had at the time of the
handover from the UK,\" says Hess.

\"In 1997, Moody\'s foreign currency ratings of Hong Kong and China were
the same and, even in retrospect, this was prudent in that no one knew
then how One Country/Two Systems would actually function,\" says Hess.

\"Considerable doubt was evident as to whether the Chinese government
would allow Hong Kong to exercise the autonomy promised it in the Basic
Law,\" says Hess, adding, \"Certainly the people of Hong Kong had doubts,
as evident by the levels of emigration prior to the handover on July 1,
1997.\"

\"As a result, Moody\'s felt 10 years ago that although standard sovereign
credit-risk indicators were consistent with a stronger rating for Hong
Kong than China, the new SAR\'s ratings could not exceed the China
sovereign,\" says Hess.

But confirmation over the last decade that One Country/Two Systems was
working led Moody\'s to conclude that a rating differential between the
Chinese government rating and Hong Kong\'s rating could be justified.

Consequently, in 2003, with China\'s fundamentals strengthening, China\'s
rating was upgraded by one notch to A2, while Hong Kong\'s rating went up
two notches to A1, breaking the one-to-one link between the ratings.

Nevertheless, Moody\'s continues to believe that the ratings should still
be linked. The increasing economic and financial ties between Hong Kong
and the Mainland mean that the two have become increasingly integrated;
thus, China risk must be an integral factor in Hong Kong\'s ratings.

In this context, Hess notes that, since the handover, China\'s economic
performance, its government policies, and the development of the
Mainland\'s own markets have been very positive factors for Hong Kong\'s
economy and finances.

Furthermore, specific policy measures have been implemented that have
helped the SAR\'s economy, such as the Closer Economic Partnership
Arrangement and the decision to allow more Mainland tourists to travel to
Hong Kong.

Financial market developments also have benefited Hong Kong, with
Mainland companies accounting now for about half the capitalization of
the Hong Kong Stock Exchange. The prospect of renminbi bond issuance is
also a positive development.

Hess adds that even though it is clear that Hong Kong\'s first 10 years as
a Chinese SAR have been positive, Moody\'s ratings still must take into
account the fact that there has not yet been a period when the Chinese
economy or political situation has been under serious stress. What the
effects of such a scenario on Hong Kong would be remain unclear.

Nonetheless, Moody\'s believes that Hong Kong has considerable buffers
against potential shocks emanating from the Mainland. Among these
cushions are: substantial fiscal reserves, equivalent to about one
quarter of GDP; a very small level of government debt; a very large net
foreign asset position in the public and private sectors; and a
relatively strong banking system.

At present, both the ratings of Hong Kong and China are on review for
possible upgrade. Earlier in September 2006, Moody\'s had upgraded Hong
Kong\'s foreign currency rating to Aa3 from A1 - two levels above China\'s
own rating - while maintaining a positive outlook.