Hong Kong Outlook Revised To Negative After Same Action On China; 'AAA/A-1+' And 'cnaaa/cna-1+' Ratings Affirmed

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Research Update: Hong Kong Outlook Revised To Negative After Same Action On China; 'AAA/A-1+' And 'cnaaa/cna-1+' Ratings Affirmed Primary Credit Analyst: KimEng Tan, Singapore (65) 6239-6350; kimeng.tan@standardandpoors.com Secondary Contact: John B Chambers, CFA, New York (1) 212-438-7344; john.chambers@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Key Statistics Ratings Score Snapshot Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 31, 2016 1

Research Update: Hong Kong Outlook Revised To Negative After Same Action On China; 'AAA/A-1+' And Overview On March 31, 2016, we revised our outlook on China to negative from stable. Hong Kong's sizable fiscal reserves, strong external position, and above-average economic growth support the ratings on the Special Administrative Region (SAR). We are revising our outlook on Hong Kong to negative from stable and affirming our 'AAA/A-1+' issuer credit rating and 'cnaaa/cna-1+' Greater China regional scale ratings. The negative outlook reflects the outlook on SAR's central government, China. Rating Action On March 31, 2016, Standard & Poor's Ratings Services revised its outlook on Hong Kong (Special Administrative Region) (SAR) to negative from stable. At the same time, we affirmed our 'AAA' long-term and 'A-1+' short-term issuer credit ratings on Hong Kong. In line with this, we affirmed our long- and short-term Greater China regional scale ratings on Hong Kong at 'cnaaa/cna-1+'. Rationale Our outlook revision on Hong Kong reflects our similar action on the People's Republic of China on March 31, 2016, which reflected economic imbalances in China that are unlikely to diminish at the pace we previously expected. In our view, the SAR and China have a high degree of financial and economic linkage. We rate the SAR three notches higher than its sovereign for several reasons. We think that Hong Kong's institutions and policies support an open and free economy with a generally predictable and effective policy framework and strong economic transparency. We believe that this favorable assessment is valid compared with the other governments (numbering close to 130) that we rate under our sovereign criteria. Although the Legislative Council rejected the Chief Executive Election Reform Proposal in June for the 2017 ballot, we believe relations between the central government and its SAR will remain constructive--as they have been since the handover to China in 1997--because a stable and prosperous Hong Kong advances China's reform agenda. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 31, 2016 2

The ratings on Hong Kong also reflect above-average economic growth prospects for a high-income economy, healthy fiscal performance, sizable fiscal reserves, a strong external position, and the credibility of monetary policy, notwithstanding the inherent limitations of a pegged exchange rate regime in carrying out independent monetary policy. That said, we do not believe that the credit standing of Hong Kong can be completely disconnected from that of the mainland, given financial and economic linkages, and the ultimate sovereign authority of China. We estimate Hong Kong's 2016 GDP per capita to be about US$44,500. We believe Hong Kong's economy is likely to grow faster than the average of high-income economies over the next three years. This forecast assumes resilient local demand, a gradual recovery in advanced economies, and China maintaining economic growth close to 6% annually. In particular, the SAR's role in facilitating China's economic and financial integration with the rest of the world should continue to support Hong Kong's financial sector, an important growth engine of its economy. Hong Kong's sizable and liquid fiscal reserves anchor its creditworthiness. The territory's conservative fiscal policy, significant expenditure flexibility, and generally solid economic growth have led to consistent fiscal surpluses since 2005. As a result, we project that the government will hold liquid assets amounting to about one-third of GDP at the end of 2016. We expect Hong Kong to maintain a prudent fiscal policy, given its long-term fiscal planning. The Future Fund, established with guidelines permitting longer-term less-liquid investments, should raise returns on Hong Kong's fiscal reserves. We rank Hong Kong banking system risk as '2' in our Banking Industry Country Risk Assessment (BICRA), with '1' being the strongest system and '10' the weakest. However, the sheer scale of the system, with total assets of more than 8x Hong Kong's GDP as of year-end 2015, suggests that a downturn in the economies of Greater China could quickly affect economic conditions in the SAR. Hong Kong's strong external creditor position stems from its sustained current account surpluses. We project Hong Kong's 2016 public and financial sectors' external assets net of total external debt at 47% of its current account receipts (CARs). We expect the broader measure of Hong Kong's entire international investment position to be 100%-115% of its CARs in the next three years. In addition, the Hong Kong dollar is actively traded globally. These strengths and the Hong Kong Monetary Authority's (HKMA) prudent regulations help maintain confidence in the banking sector, which has large short-term external debts typical of a global financial center. We believe Hong Kong's long-established Linked Exchange Rate System (LERS) has facilitated its monetary and financial stability. While the peg of the Hong Kong dollar to the U.S. dollar under the LERS means that Hong Kong's short-term interest rate largely follows that of the U.S., the HKMA has been WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 31, 2016 3

able to use regulatory and supervisory measures to lessen the impact of sharp economic and financial fluctuations. We expect the HKMA to maintain a pegged exchange rate regime and safeguard financial stability with regulatory measures. Outlook The negative outlook on the long-term rating on Hong Kong mirrors the negative outlook on our long-term rating on China. In the absence of a further strengthening of the independence of the SAR's already resilient and effective institutions, we would likely lower our rating on Hong Kong by one notch if we lowered our rating on China. In addition, we might lower our rating on Hong Kong without a downgrade of China, if Hong Kong's political polarization worsens to a point where it compromises policymaking and the business environment. In such a scenario--which is not our base case--we would expect a gradual deterioration of the SAR's above-average growth, healthy fiscal reserves, and strong external position. On the other hand, we could revise the outlook on Hong Kong back to stable if we took the same action on China, all other things being equal. Key Statistics Table 1 Selected Indicators - Special Administrative Region Hong Kong 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ECONOMIC INDICATORS (%) Nominal GDP (bil. LC) 1,776 1,934 2,037 2,138 2,258 2,403 2,541 2,688 2,846 3,011 Nominal GDP (bil. $) 229 249 263 276 291 310 328 347 367 388 GDP per capita ('000s $) 32.6 35.1 36.7 38.4 40.2 42.4 44.5 46.7 49.1 51.6 Real GDP growth 6.8 4.8 1.7 3.1 2.6 2.4 2.6 2.7 2.7 2.7 Real GDP per capita growth 6.0 4.1 0.5 2.6 1.9 1.5 1.8 1.9 2.0 2.0 Real investment growth 7.7 10.2 6.8 2.6 (0.1) (2.2) 2.3 2.4 2.3 2.3 Investment/GDP 23.9 24.1 25.2 24.0 23.8 21.8 21.3 21.0 20.9 20.4 Savings/GDP 30.9 29.7 26.8 25.5 25.1 27.3 27.0 26.5 26.1 25.9 Exports/GDP 219.4 225.5 225.6 228.0 219.4 201.2 202.5 203.2 203.8 204.7 Real exports growth 16.8 3.9 1.9 6.2 0.9 (1.5) 2.7 2.5 2.5 2.5 Unemployment rate 4.3 3.4 3.3 3.4 3.3 3.4 3.4 3.2 3.3 3.3 EXTERNAL INDICATORS (%) Current account balance/gdp Current account balance/cars 7.0 5.6 1.6 1.5 1.3 5.5 5.7 5.5 5.2 5.5 2.7 2.1 0.6 0.5 0.5 2.1 2.2 2.1 2.0 2.1 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 31, 2016 4

Table 1 Selected Indicators - Special Administrative Region Hong Kong (cont.) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Trade balance/gdp 1.4 (3) (7.2) (10.1) (11.1) (8.3) (7.6) (7.3) (7.1) (6.7) Net FDI/GDP (6.9) 0.1 (5) (2.4) (3.8) (5) (5) (5) (5) (5) Net portfolio equity inflow/gdp Gross external financing needs/cars plus usable reserves Narrow net external debt/cars (24.9) (0.6) (1.6) (18.1) (2.9) (5) (7) (7) (7) (5) 151.0 163.5 167.6 165.1 177.5 181.7 183.1 186.7 187.9 188.8 (64.4) (61.1) (63) (60.1) (57.1) (54.8) (46.5) (40.2) (34.1) (29.1) Net external liabilities/cars (123.3) (118.3) (115.8) (107.8) (119.8) (121.7) (114.9) (110.2) (105.6) (101.2) Short-term external debt by remaining maturity/cars 85.8 98.7 103.0 100.2 111.7 119.1 118.3 117.2 116.1 114.7 Reserves/CAPs (months) 2.6 2.5 2.5 2.5 2.3 2.4 2.2 1.9 1.7 1.5 FISCAL INDICATORS (%, General government) Balance/GDP 4.3 3.9 3.2 1.1 3.3 1.5 0.5 0.0 0.5 1.5 Change in debt/gdp 0.0 0.0 0.0 0.0 (0.4) 0.4 0.0 0.0 0.0 0.0 Primary balance/gdp 4.3 3.9 3.3 1.1 3.3 1.5 0.5 0.0 0.5 1.5 Revenue/GDP 21.2 22.6 21.7 21.3 21.2 20.5 20.3 20.0 20.0 20.0 Expenditures/GDP 16.9 18.7 18.5 20.2 17.9 19.0 19.8 20.0 19.5 18.5 Interest /revenues 0.2 0.1 0.1 0.1 0.1 0.0 0.1 0.1 0.1 0.0 Debt/GDP 0.6 0.6 0.5 0.5 0.1 0.4 0.4 0.4 0.4 0.3 Debt/revenue 3.0 2.6 2.5 2.5 0.3 2.1 2.0 1.9 1.8 1.7 Net debt/gdp (32.9) (34) (34.9) (36) (35.1) (34.5) (33.2) (31.3) (30.1) (30) Liquid assets/gdp 33.5 34.6 35.5 36.5 35.2 35.0 33.6 31.7 30.5 30.3 MONETARY INDICATORS (%) CPI growth 2.4 5.3 4.1 4.3 4.4 3.0 2.5 2.3 2.3 2.3 GDP deflator growth 0.3 3.9 3.5 1.8 2.9 3.9 3.1 3.0 3.1 3.0 Exchange rate, year-end (LC/$) Banks' claims on resident non-gov't sector growth Banks' claims on resident non-gov't sector/gdp Foreign currency share of claims by banks on residents Foreign currency share of residents' bank deposits 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 7.8 27.8 18.7 3.3 15.3 13.0 8.0 8.0 8.0 8.0 8.0 185.6 202.3 198.5 218.2 233.4 236.9 241.9 247.0 251.9 257.2 16.4 18.6 20.5 24.6 25.1 24.6 30.5 30.5 30.5 30.5 47.3 50.7 49.7 52.2 52.3 50.6 50.6 50.6 50.6 50.6 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 31, 2016 5

Table 1 Selected Indicators - Special Administrative Region Hong Kong (cont.) Real effective exchange rate growth 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (1.9) (1.2) 6.6 2.2 1.6 N/A N/A N/A N/A N/A Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. The data and ratios above result from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. Ratings Score Snapshot Table 2 Ratings Score Snapshot - Special Administrative Region Hong Kong Key rating factors Institutional assessment Economic assessment External assessment Fiscal assessment: flexibility and performance Fiscal assessment: debt burden Monetary assessment Standard & Poor's analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of Standard & Poor's "Sovereign Rating Methodology," published on Dec. 23, 2014, summarizes how the various factors are combined to derive the sovereign foreign currency rating, while section V.C details how the scores are derived. The ratings score snapshot summarizes whether we consider that the individual rating factors listed in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts of "strength", "neutral", or "weakness" are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated sovereigns will typically display more strengths, and lower rated sovereigns more weaknesses. In accordance with Standard & Poor's sovereign ratings methodology, a change in assessment of the aforementioned factors does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the assessments. Related Criteria And Research Related Criteria National And Regional Scale Credit Ratings, Sept. 22, 2014 Standard & Poor's National And Regional Scale Mapping Tables, Jan. 19, 2016 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Sovereign Rating Methodology, Dec. 23, 2014 Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 31, 2016 6

Related Research Sovereign Risk Indicators at http://spratings.com/sri Sovereign Rating And Country T&C Assessment Histories, Aug. 4, 2015 Sovereign Ratings Score Snapshot, Aug. 4, 2015 Asia-Pacific Sovereign Rating Trends Mid-Year 2015, July 14, 2015 Global Sovereign Rating Trends Mid-Year 2015, July 13, 2015 Asia-Pacific Could Be Entering A Steady State Of Slower Growth, July 8, 2015 2014 Annual Sovereign Default Study And Rating Transitions, May 18, 2015 Why Subnational Borrowing In Asia May Soon Take Off, March 15, 2015 Asia-Pacific Sovereign Debt Report 2015: Total Borrowing Is Likely To Remain Close To US$2.6 Trillion In 2015, March 5, 2015 Global Sovereign Debt Report 2015: Borrowing To Drop By 5.7% To US$6.7 Trillion, March 5, 2015 Banking Industry Country Risk Assessment: Hong Kong, Jan. 21, 2015 In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee agreed that all key rating factors were unchanged. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria And Research'). Ratings List Ratings Affirmed; Outlook Action To From Hong Kong (Special Administrative Region) Sovereign Credit Rating AAA/Negative/A-1+ AAA/Stable/A-1+ Ratings Affirmed WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 31, 2016 7

Hong Kong (Special Administrative Region) Greater China Regional Scale cnaaa/--/cna-1+ AAA cnaaa Short-Term Debt A-1+ Short-Term Debt cna-1+ Hong Kong Sukuk 2014 Ltd. Hong Kong Sukuk 2015 Ltd. AAA cnaaa AAA cnaaa Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 31, 2016 8

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