Moody’s has slashed its outlook on Hong Kong and Macau and placed several of China’s state-owned companies and banks on downgrade warnings.

The ratings agency said the decision regarding Hong Kong and Macau considered their close political, institutional, economic and financial links with China under their “One Country, Two Systems” arrangements, Reuters reports.

However, Hong Kong has criticised the decision, saying that its links with Beijing were “a source of strength for long-term development.” Hong Kong is rated one notch higher than China at Aa3 compared to A1.

Yet Moody’s also said that 2020’s National Security Law and modifications to Hong Kong’s electoral system meant it forecast the loss of the city’s autonomy “to continue incrementally.”

In addition, the weakening economy in Mainland China would impact Hong Kong’s economy, and diminished growth may also eat into Hong Kong government’s financial buffers.

Furthermore, the rating agency also reduced the outlooks of 26 local government financing vehicles and four state-owned organisations, with all 30 on “review for downgrade.”

Another eight Chinese banks also had their outlooks slashed to negative but weren’t placed on “review for downgrade.”

Moreover, economists cut their expectations for GDP growth in 2023 to 3.3% from a previous forecast of 4%, as per the average estimate in the most recent Bloomberg survey of economists.

Q4 growth is predicted to hit 4.8% year-on-year, falling short of a 6.5% forecast in the previous survey in September.

The outlook for 2024 is also weaker, with GDP growth forecast at 2.7% next year compared to 2023, under an earlier prediction of 3%.

“Hong Kong would rue many missed opportunities for a lacklustre 2023 where its recovery out of the pandemic has not even put annual GDP past the pandemic peak of 2021,” stated Heron Lim, economist at Moody’s Analytics. That year, the economy grew 6.4%, rallying from 2020’s 6.5% decline.