Australia and Hong Kong trade relationship – alert but not alarm

Australia has an extensive and enduring relationship with Hong Kong that can be traced back to the mid-nineteenth century. Nowadays, Hong Kong is one of the major trading partners of Australia and a gateway for Australian businesses to access China, as well as North and Southeast Asia markets. Hong Kong was the twelfth largest trading partner overall in 2018 with two-way trade in goods and services of more than $17 billion. In 2018, Hong Kong was Australia’s seventh most important destination for merchandise exports and seventh-largest services market worth $10 billion and $3 billion respectively. Hong Kong is Australia’s fifth largest source of total foreign investment, with a total investment of $118.8 billion at the end of 2018.

Recent development

The rule of law, robust financial market, freedom and stability in the society have always been the key success factors of Hong Kong being an international financial hub. However, since June 2019, these have been shattered by the extradition bill proposed by the Hong Kong Government (which was declared to be withdrawn on 4 September 2019). Significant concern has been raised by the local legal sector, business community and the public in general, as the bill potentially jeopardises the transparency and integrity of the judicial system of Hong Kong, and the business environment. This resulted in multiple protests the bill and demand for an independent commission of inquiry into handling of these protests by law enforcement agencies.

Impact to business sentiment

With the reputation as one of the best places to do business, Hong Kong is under threat due to the uncertainty and instability that the city is experiencing, reports suggested that businesses are considering relocating resources to places like, Singapore and Australia. This is also reflected in the volatility in the stock market, together with impact of US-China Trade war, the Heng Seng Index (“HSI”) which was at 28,875 on 2 July 2019 have since dropped to circa 25,500 in early September 2019. Furthermore, Fitch Ratings recently revised Hong Kong’s credit rating to AA from AA+, with a negative outlook to the city’s economy citing that “they are at risk of being further eroded … as a result of the blow to domestic activity precipitated by continued unrest”.

Notwithstanding the challenges and softening economy, the fundamentals and business sentiments are still sound. The unemployment rate remains below 3% and underlying inflation remains above 3%. Back in Australia, the free trade agreement between Australia and Hong Kong is still on track to be finalised by end of this year despite the unrest.

This article was co-authored by Philip Kan, HLB Mann Judd Melbourne.