Australia suspended its extradition treaty with Hong Kong in response to fears of a new national security law imposed by China.
Prime Minister Scott Morrison said the new law undermined the "basic Hong Kong law" and the current level of autonomy of the territory in relation to Beijing.
Australia plans to extend the visa to Hong Kong residents and encourage companies to move, he said.
China criticized the measure as "gross interference" in its domestic affairs.
"We ask that the Australian side immediately stop meddling … otherwise it will lead to nothing but lifting a rock just to hit its own feet," said a statement from its embassy in Australia.
Canada has also suspended its extradition contract since last week's broad law was enacted.
Critics say the law makes it easier to punish protesters and critics of the Chinese government.
The Hong Kong government says the law is required to bring order to a city that has seen massive pro-democracy protests in the past year that have often turned violent.
As the extent of the law's scope is still uncertain, critics said it could also lead to arbitrary detention of foreigners in Hong Kong.
This prompted Australia and other nations to issue new notices to their citizens in Hong Kong. More than 100,000 Australians are in the city.
"You may be at increased risk of detention for vaguely defined national security reasons. You can break the law without intending to. If you are concerned about the new law, reconsider your need to stay in Hong Kong," said the Department of Foreign Affairs. . Affairs and Trade.
Morrison said his government, along with others, "has been very consistent in expressing our concerns about enforcing national security law in Hong Kong".
Previously, Australia and Hong Kong were able to seek the extradition of anyone within their jurisdiction who was sought by a judicial process or criminal sentence. This process has only happened twice in the past 10 years.
Australia has also offered to extend the visa to Hong Kong residents over five years – providing a path to permanent residence for up to 10,000 people.
Morrison said the visa offer is also aimed at attracting Hong Kong companies to move to Australia if they "become free as a result of the changes".
Hong Kong is a former British colony and was returned to China in 1997.
Under the agreement, Hong Kong was allowed to have certain freedoms for 50 years, differentiating it from the Chinese mainland.
However, the United Kingdom and other Western nations say that China's new law directly threatens these freedoms and rights.
Last week, the UK offered resettlement for up to three million Hong Kong residents – an action criticized by China.
Australia's announcement could again heighten tensions with China, its biggest trading partner.
Bilateral relations have further deteriorated this year, after Australia called for a global investigation into the origins of Covid-19. This was seen as the catalyst for China's sanctions on Australian exports.