Hong Kong’s pensions regulator has pushed back against requests to change rules that would require funds to sell Treasuries in the event of another US ratings downgrade, and instead told funds to draw up “contingency plans.”
The Mandatory Provident Fund Schemes Authority, which regulates Hong Kong’s pension system, said in an emailed statement Wednesday it had “urged MPF trustees to evaluate the potential implications if the US loses its last AAA rating by an approved agency.”
Funds operating under the city’s HK$1.3 trillion ($213.96 billion) MPF system are only allowed to invest more than 10% of their assets in Treasuries if the US has a AAA or equivalent credit score from an approved agency. After Moody’s Ratings’ downgrade earlier this month, the only remaining such score is from Japan’s Rating & Investment Information Inc.
The city’s pension funds had asked the authority to reconsider this requirement. But in its statement it the MPFA said it has “no plan to amend the relevant regulations.”
Instead it said fund managers “must formulate suitable compliance contingency plans and make timely and orderly adjustments to their asset allocation in response to possible market developments.”
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Bloomberg reported last week that Hong Kong pension fund managers concerned about the risk of forced sales were lobbying officials to change the rules. They recommended authorities make an exception for US Treasuries by allowing funds to invest freely in the assets even if they are rated one notch below AAA, according to people familiar with the matter.
The situation underscores the risks of the US falling foul of the unusually strict investment mandates governed by Hong Kong laws. The bulk of global investors do not require the top-tier rating to invest freely in US Treasuries — a factor which minimises the risk of forced sales.
The development also risks putting more pressure on Treasuries. The 30-year yield on the US bonds already climbed to the highest since 2023 this month amid concerns of the ballooning US budget deficit and trade war uncertainty.
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MPFA’s response has caused the Hong Kong Investment Funds Association — a local industry group for fund managers — to raise concerns.
“We exhort MPFA to revisit the existing requirement, which was crafted about 25 years ago,” Sally Wong, chief executive officer for HKIFA, said in a statement to Bloomberg. “To be fit for purpose, the regulatory framework needs to move with times and take into account changing macro and structural trends.”
The South China Morning Post reported the latest MPFA statement earlier.
For now, Japan’s R&I continues to rate the US as an AAA credit with a stable outlook. Kazuki Hara, chief analyst at R&I said his firm was likely to maintain its current rating, at the time of the Moody’s downgrade.
