I recently listened to Praxity’s latest podcast episode on the effects of COVID-19 on China. It was a great recap of the webinar Praxity hosted with Stephen Weatherseed, Managing Partner from Mazars Hong Kong, Alice He, Tax Partner from ShineWing and Thierry Labarre, Founding Senior Partner for Mazars China.
The team shared insights into how the local economies have been impacted and what support has been available for businesses. Known as one of the world’s most important financial centres, Hong Kong has attracted many multinational companies with its free economy and competitive tax regime. Around 60% of foreign investment goes through the city.
The initial impact of the pandemic was a familiar story, with retail, transport and tourism hit hardest hospitality venues including hotels being transformed into quarantine facilities. Mirroring the same trends across the globe, the market saw a spike in luxury goods and pharmaceuticals.
With the collapse in GDP growth during the COVID-19 pandemic, Hong Kong declined by 9% in the second quarter but is showing signs of recovery with the easing of lockdown measures and the rebound of domestic demand.
The international springboard for trade
Seen as a gateway for international trade, Hong Kong has been a magnet for companies wanting to access growing markets in the region. What’s attractive to businesses is that they have their own open financial system and currency (linked to US dollars) along with their own legal system (based on common law). With no capital controls and no restrictions on information, there is a free flow of money.
With thousands of international firms based in the city, it’s home to some of the largest investors in the Australian economy. Well known for their low tax regime, the government has been focused on boosting technology and innovation and attracting early stage companies to market.
Australia has a large business network in the region that includes the Australian Chamber of Commerce Hong Kong and Macau (AustCham). Earlier this year we entered the Australia-Hong Kong Free Trade Agreement which promised more opportunities for Australian businesses and farmers.
What will be the impact from Australia and China tensions?
While Hong Kong’s independence has helped it become a global financial and re-export hub, it’s unknown what will become of trade agreements. On May 28, Beijing imposed national security laws on Hong Kong, ignoring warnings from Washington following the ongoing China-US trade war. The deteriorating relationship between China and the US led to threats of increased tariffs and the removal of the special trade status.
Although Hong Kong won’t be directly affected by increased tariffs or status changes, it will lose out on revenues owing to the trade war while tariffs show no sign of being quashed. There are also thousands of firms located in the city, which have billions of dollars in assets under management. This type of unrest affects investments and global business interests.
As the trade dispute with China worsens, Australian exporters could see billions worth of products turned away. Chinese importers were told by officials early November that Australian wine, lobsters, sugar, coal, copper ore, barley and timber would be banned from the country. With bans and heavy tariffs already in place, it’s expected that wheat will also join the list.
The “import suspension” could see Chinese consumer confidence in Australia products drop dramatically, impacting jobs.
Could it get worse?
Demand for Australian iron ore, coal and LNG is booming. Despite increased tensions, sales are up to 8% and 9% year-to-date respectively versus 2019. Latest reports show that iron ore reached $8 billion in August and is expected to reach $10 billion per month as the biggest export to China, accounting for around 80% of consumption. Chinese imports of Australian coal are well ahead of where they were pre-pandemic.
China’s fast recovery for 2021
Foreign Investment Law took effect on 1 January 2020, which marked the most important milestone of China’s recent reform of its foreign investment regime. This sent a positive sign from the Chinese Government to the outside world in opening and stabilising the Chinese economy and further promoting foreign investments.
Coupled this with the latest version of the reduced negative list for foreign investments (issued on 23 June 2020), opportunities will open with relaxed restrictions on foreign investments in various sectors. With the continuous inflow of investment funds to China via Hong Kong, foreign investors should actively explore investment opportunities in China, but at the same time, understand the political tension in play.
Despite the ongoing trade tensions, China remains an attractive market for foreign investors as domestic economic growth continues to lead with rising disposable incomes amongst the upper and middle-class consumers.
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