Sir Donald Tsang, Hong Kong's financial secretary, described the move as "unfair, unreal and improper". He accused Moody's of simply including Hong Kong "in the same broad brush of all the other countries affected by the currency crises", ignoring the stability of the Hong Kong dollar.
Moody's said the downgrade resulted from increased volatility in East Asian markets, which was affecting the Hong Kong environment. However, the agency noted that the territory's "fiscal situation and regulatory environment remain sound".
Short-term debt of the two Hong Kong railway corporations, previously blue-chip rated borrowers, has been downgraded from Prime-1 to Prime- 2. The outlook for foreign currency borrowings of these two institutions and other prime Hong Kong borrowers has also been downgraded from stable to negative.
Although there was considerable surprise at these revaluations, investors seemed less concerned than the Hong Kong government. The stock market inched marginally upwards after a day of lacklustre trading. The benchmark Hang Seng Index rose 0.6 per cent to 10,551.70. Stocks likely to be affected by the Moody's re-rating showed no sign of being marked down.
Moody's also raised some eyebrows by reclassifying the outlook for China's bonds, notes and bank deposits from stable to negative.
Meanwhile, Japan's ruling Liberal Democratic Party has dashed hopes by producing an economic stimulus package which fell far short of expectations.
The package, issued yesterday, contained neither the tax cutting or increased government spending measures which were anticipated by the financial markets. The stock market responded apathetically, ending the day up less than 1 per cent.
The package focused on deregulation measures and a clutch of soft loans to troubled East Asian countries.