South Korean industries are on alert as the growing tensions between the U.S. and China that might revoke Hong Kong`s trading privileges could mean a significant increase in logistics costs for many exports that use Hong Kong as the hub of intermediate trade.

It is another whammy for Asia’s fourth largest economy after U.S.-China conflicts over Chinese tech giant Huawei could cause a drop in demand for semiconductor, Korea’s main stay export item to China.

Hong Kong is the fourth largest export destination of South Korea, which ran the largest trade surplus of $30.13 billion from Hong Kong last year, according to data from Korea International Trade Association (KITA) on Sunday. Hong Kong serves as an intermediate trade hub for South Korean businesses to re-export to mainland China due to its low corporate tax, stable currency, proximity to mainland China and attractive trade infrastructure.

Last year alone, more than 90 percent of exports from South Korea to Hong Kong eventually ended up in mainland China. Semiconductor products accounted for 70 percent of Korea`s $31.9 billion exports to Hong Kong last year. Most of semiconductors shipped from Korea to Hong Kong arrive in China.

Since semiconductors are basically tariff-free products, Korea can convert its semiconductor shipment directly to China from Hong Kong, but it would be inevitable to see an increase in logistics costs.

In addition, U.S. sanctions on Huawei might restrict production of smartphones, leading to a decline in memory chip demand.

Korea’s other exports items such as cosmetics and agricultural and marine products are also expected to be hit because of tougher customs clearance in China than Hong Kong.

Some however see silver lining.

KITA predicts that Korean exports to the U.S. will be in a relative competitive advantage. Such benefits could go to petrochemicals, home appliance, medical and precision, and optical devices, steel products, and plastics manufacturers in Korea.

The Korean financial sector however would receive a setback if Hong Kong loses its autonomous identity because local financial companies have no immediate alternative channel to attract the yuan. Korean financial companies such as KDB and Shinhan have issued yuan-denominated dim sum bonds in Hong Kong.

An industry official expressed concerns that if the Hong Kong crisis continues, Korea may see a drop in its foreign exchange efficiency since the proportion of the yuan in its foreign basket will decline and the dependence on the greenback will deepen.

Luckily, dim sum bonds issued by Korean businesses have lately decreased. The figure stood at $1.81 billion in 2018, but it plummeted to $150 million in 2019.

But Korean banks have huge presence in Hong Kong. As of the third quarter of last year, exposure to Hong Kong by five Korean banks (KDB, KB, Woori, Hana, and Shinhan) came to 4.84 trillion won ($3.94 billion).

A chunk of funds recently left Hong Kong and moved to Singapore, said a Korean financial company’s chief executive, adding interest rates in Hong Kong’s financial market may increase overall, raising the borrowing cost for Korean financial companies in the future.

By Moon Il-ho, Won Ho-sup, Baek Sang-kyung, Chun Gyung-woon and Minu Kim

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]