'Hong Kong Exodus More Frightening Than COVID-19'

[Asia Economy Reporters Sohyeon Park and Minyoung Kim] As tensions between the U.S. and China escalate, major export companies in the semiconductor sector and financial institutions have begun preparing response plans for various scenarios. Semiconductor companies, which posted solid first-quarter results despite the COVID-19 pandemic, are preparing for the worst-case scenario of logistics paralysis in Greater China regions such as Hong Kong in the second half of this year, while financial firms have entered an emergency posture in anticipation of a 'Hong Kong exodus.'

According to industry sources on the 28th, semiconductor companies including Samsung Electronics and SK Hynix are conducting a comprehensive review of the existing export routes to China via Hong Kong, considering the extreme possibility that U.S. warnings such as the revocation of Hong Kong's special status may materialize. They are gauging the intentions of major customers regarding changes in the logistics environment and actively preparing alternatives in light of expected demand deterioration in the third quarter.

A semiconductor industry official said, "We had a positive internal atmosphere with early sell-outs of planned volumes in the second quarter and continuous price increases this year, but with the worsening of the COVID-19 situation and the Hong Kong crisis, it has become impossible to predict the third quarter." He added, "Basically, most of the Hong Kong shipments are destined for China, so if the Hong Kong route is blocked, logistics costs will increase, raising concerns about an overall demand decline."

Hong Kong serves as a trade hub used as an export transit point by several countries besides South Korea. China also conducts hundreds of trillions of won in trade annually by sending products manufactured on the mainland to Hong Kong before exporting them worldwide. As the world's third-largest financial center, Hong Kong has been attractive due to its ease of capital procurement, tariff exemptions, and low corporate taxes. It has played an intermediary role offsetting legal and institutional risks faced when trading directly with mainland China.

The semiconductor industry is highly alert, having learned from the crisis when exports plunged by more than 40% year-on-year during the intensified Hong Kong protests in July and August last year. According to the Korea International Trade Association, 70% of exports to Hong Kong last year were semiconductors. The share of Hong Kong exports in the domestic semiconductor industry is also significant. Semiconductor exports to Hong Kong amounted to $22.3 billion last year. During the same period, exports to China totaled $37.3 billion, and exports to the U.S. were $6 billion.

The biggest concern for semiconductor companies is the decline in purchasing sentiment caused by the loss of conveniences such as customs clearance and tariff benefits that existing customers enjoyed in Hong Kong. Over 90% of the volume exported to Hong Kong is re-exported to China, so if Hong Kong loses its advantages as a trading nation, proactive measures must be taken to expand direct export logistics channels to China.

Domestic financial companies are also closely monitoring the local situation and its potential impact on financial markets. In preparation for the worst-case scenario, if an exodus of overseas financial firms from Hong Kong occurs, relocation to alternative regions such as Singapore is being considered. They have begun analyzing the potential market impact and are monitoring the movements of foreign financial institutions. A representative from a commercial bank said, "Although the intensified U.S.-China conflict is not expected to cause immediate severe damage to the Hong Kong market, we are closely watching the possibility that Hong Kong may lose its status as a global financial hub and that foreign financial firms may withdraw, and we are preparing accordingly."

As of the end of June last year, 30 Korean financial companies had established a presence in Hong Kong, including 11 banks, 9 securities firms, 8 asset management companies, 1 non-life insurer, and 1 life insurer. Shinhan Bank, which has branches and investment banking (IB) branches in Hong Kong, employs about 40 people, and Woori Bank also maintains both an IB corporation and a branch. Other banks such as Kookmin and Hana have also operated branches in Hong Kong to target advanced markets. A financial industry official said, "We are continuously monitoring the situation in Hong Kong and identifying any abnormal signs. If the situation worsens to the extent that it disrupts local operations, each financial company is considering relocating to alternative regions such as Singapore."