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Exports: Recovery with Headwinds

Asia remains a major electronics production centre, with a detailed division of production processes  

Asia remains a major electronics production centre, with a detailed division of production processes and transportation of parts and components among manufacturing bases (photo: EPN)

It was, by many measures, an extraordinary leap in difficult conditions. Hong Kong exports soared 25 per cent in the first quarter of 2011, even though production costs were surging, with export unit prices up 7.6 per cent. There was also gathering inflation, while factors such as the Japanese disasters and escalating civil unrest in the Middle East were poised to make an impact in the second quarter and beyond. 

The good news for exporters is that signs suggest the global economy will continue to be in good shape, notably for commodity exporters and Asian countries with large domestic markets, such as the Chinese mainland, India and Indonesia. 

Given the better-than-expected performance so far this year, Hong Kong’s total exports are now forecast to grow by 12 per cent in 2011, against the eight per cent rise earlier predicted. 

There is, however, little room for complacency. The Japanese earthquake and associated disasters could affect one per cent of Hong Kong’s total exports for 2011, while sales hit by the crisis in the Middle East and African region (MENA) could amount to 0.6 per cent of total exports. 

In addition, soaring production costs, triggered by spiralling raw material costs and gyrating wages on the mainland, could well remain a major challenge for Hong Kong exporters. 

Hong Kong’s merchandise performance was again above expectations for the first three months of 2011. Total exports were driven by solid increases of 25 per cent for re-exports and 12 per cent for domestic exports. 

This exceptional performance was achieved despite a high base for comparison, and rebounded strongly from a modest 14 per cent growth in the final quarter of 2010, following increases of more than 20 per cent in the previous three quarters. 

The showing was supported by burgeoning intra-Asian trade. Sales to the mainland, which constituted 54 per cent of Hong Kong exports, climbed 28 per cent, with hearty demand for machinery and semi-manufacturing, notably electronics parts and components for export processing production. 

There was also sustained export growth in the region, reflected by greater demand for capital goods and production inputs. Sales to traditional markets were more moderate, although double-digit increases were still recorded. The European Union, spearheaded by Germany, registered a commendable 14 per cent rise. The United States, for its part, demonstrated a 13 per cent increase. Exports to Japan, where growth should have been hit by the fallout from the earthquake, still rose by 11 per cent in the first quarter. 

Growth Engine

Soaring mainland wages have substantially boosted production costs   

Soaring mainland wages
have substantially boosted production costs
(photo: EPN)

Electronics, which jumped 29 per cent in the first quarter of 2011, to account for 57 per cent of Hong Kong’s total exports, remained the primary engine of growth. The global demand for electronics was stronger than earlier forecast. 

The strength of the world electronics market was clearly evident, with first-quarter earnings from giant multinationals such as Apple (with its sizzling iPhone demand) and Intel (due to a voracious appetite for personal computers) beating out analysts’ expectations. 

Asia remains a major electronics production hub, with a detailed division of production processes and transportation of parts and components among manufacturing bases; these were factors that boosted intra-regional trade, injecting much-needed vitality into Hong Kong exports. 

Electronics aside, timepieces and jewellery grew 25 per cent and 18 per cent respectively, while clothing, up eight per cent, and toys, inching up two per cent, were laggards among major product categories. What’s more, escalating unit values of Hong Kong exports have significantly contributed to the faster-than-expected sales expansion. In spite of sustained overseas demand, consumer adherence to value for money continued to drag prices. 

Nevertheless, towering input costs have bloated export prices. Hong Kong exporters have not been able to pass on all cost increases to overseas buyers. For example, crude oil and gold prices, on the back of unabated global demand and loose monetary conditions with a relatively weak US dollar, displayed respective increases of some 10 per cent since the beginning of the year – despite sharply lower commodity prices recently. 

In most cases, lofty price increases have translated into much higher input costs and, hence, more expensive finished products, with supply disruptions of certain electronics parts and components from Japan only adding to the woes. 

Significantly, soaring labour costs on the mainland have substantially raised production costs. To attract migrant workers, Hong Kong manufacturers must increase wages and other benefits, further raising production costs. 

According to a survey by the Hong Kong Trade Development Council, 98 per cent of respondents saw higher labour costs on the mainland in the second quarter of 2011, vis-à-vis 78 per cent in the first quarter of 2011 and 74 per cent in the final quarter of 2010. 

A strong renminbi, which has appreciated by more than four per cent against the US dollar since last June, has compounded the problem. To a certain extent, these increased costs have been translated into a higher unit value of Hong Kong exports – up 7.6 per cent in the first three months of 2011, against a 4.7 per cent rise last year.

Global Outlook

  The Japan disaster earlier this year and the political unrest in the Middle East have cast a pall ov 


The Japan disaster earlier this
year and the political unrest in the Middle East have cast a pall over the global outlook in the medium term (photo: EPN)

A sustained recovery of overseas markets is certainly good news for Hong Kong exporters. In traditional markets, the US is set to lead the pack. In the EU, some core members, especially Germany, will see decent growth despite the lingering sovereign debt crisis. 

Resurgence in many emerging economies should also stay strong. Holding particular promise are commodity exporters, as well as Asian countries with a huge domestic market, notably the mainland. 

Yet the disaster in Japan and the political unrest in MENA have cast a pall over the medium-term outlook. World economic growth, according to the International Monetary Fund, is expected to stand at 4.4 per cent in 2011 and 4.5 per cent in 2012, after growing by five per cent last year. 

In the US, massive monetary and fiscal support, including the bond-purchase programmes and extension of tax cuts and social benefits, is leading to financial stability and rallies in stock prices, which contribute in turn to improved consumer and business sentiment.

Against this backdrop, there are signs that both consumption and corporate earnings are advancing, while joblessness has begun to edge down, although the unemployment rate is still high by historical standards. 


Electronics Jump-starts Trade


Hong Kong exports of electronics products grew by a better-than-expected 29 per cent during the first quarter, following 28 per cent growth in 2010. This was thanks to the solid demand from the Chinese mainland, which absorbed more than 60 per cent of Hong Kong’s total electronics exports, notably for inputs for export processing production. 

Other Asian economies saw Hong Kong exports, mainly parts and components, expand on the back of a regional revival in export production. 

What the Consumer Wants

Sales to other major markets, including the US and the EU, have also performed well, given the sustained resurgence of consumer demand for electronics. 

The world electronics market has been fuelled by trendy products such as iPhones and iPads, which have stimulated demand for tablets and smartphones, as well as complementary products and accessories. 

Electronics exports have been assisted by a steady demand for the replacement and upgrading of computers and telecom equipment, given the stronger consumer and business sentiment. 

Sales of audiovisual (AV) equipment have been assisted by the popularity of large-screen TVs and digital devices, although competition in the market has become fierce. 

The sustained demand for consumer electronics continues to boost the derived demand for parts and components, prolonging the upturn of the global electronics cycle. 

For the rest of 2011 and probably 2012, electronics exports will perform well, in view of the continued demand for trendy digital products. Exports of parts and components, especially re-exports of semiconductors, will be boosted by further expansion of the mainland’s processing production. 

Exports of AV products and parts, however, will be less robust, as fierce competition cuts prices. The market for AV equipment will be less energetic than for IT and telecom products. Products with more advanced and green features will likely be better received. If anything, the shortage of components and materials following the Japan earthquake will slow Hong Kong exports. For now, some players have been able to secure certain supplies from alternative sources, notwithstanding longer delivery lead times and higher purchasing costs. 

As to household electrical appliances, Hong Kong exports managed to expand by 20 per cent last year and 22 per cent in the first quarter of 2011. 

But exports in the year ahead are expected to slow. Sales of household electrical appliances will be constrained by intensified price competition and weaker consumer sentiment in Japan. To complicate matters, the popularity of trendy IT and telecom products may further erode the discretionary demand for electrical appliances. 


The housing market, on the other hand, remains sluggish, and high gasoline prices are eroding spending power. This means that consumers will likely remain conservative, especially when the extended fiscal and monetary expansion fades. 

These likely developments presage a better sales outlook for products that offer value for money. Clouded by the hovering sovereign debt crisis, the EU is expected to stay on a slower lane, with a two-speed recovery prevailing. On the one hand, there will likely be sturdy growth for some core members. 

A case in point is Germany, where strength in manufacturing and exports is filtering through to the domestic sector. On the other hand, the Eurozone’s peripheral economies, hampered by austerity moves to contain current and fiscal imbalances, are expected to remain fragile for the foreseeable future. 

Japanese Fallout

Developments in Japan are even worse, due mainly to the March earthquake, the country’s most powerful on record. But even before the quake, the Japanese economy was set to slow noticeably because of entrenched deflationary pressure, alongside weakening exports amid a strong yen. The cost of the powerful quake, tsunami and nuclear fallout could top US$300 billion, slashing the country’s GDP in 2011 by between two and three percentage points. 

Still, developing Asia should continue to lead the world recovery, although inflationary pressure stands out as the major concern. Significantly, the mainland is expected to see growth remain healthy this year and next despite monetary tightening to prevent overheating. Its 12th Five-Year Programme (FYP), approved by the National People’s Congress in March, will offer new dimensions for Hong Kong companies. The programme foresees that economic growth in the years ahead will be driven more by domestic demand, particularly private consumption, than by exports and inward investment. 

Hong Kong, as a brand showcase and trendsetter, is expected to benefit from a growing and increasingly sophisticated mainland consumer market. 

While the mainland will invest much more in R&D in the next five years and move to upgrade technology to meet FYP targets, it will need to acquire the necessary technology. Hong Kong’s role as a technology marketplace should flourish as a consequence. 

Hong Kong must also look to other regional markets for sales expansion. Various Asian governments, fearing surging inflation, are tightening their monetary grip to ensure macroeconomic stability and medium-term growth. Yet the economic environment should remain generally favourable, helped by sustained domestic demand and continued export expansion. Intra-regional trade in general, and demand from the mainland in particular, will remain a key stimulus to other Asian economies. 

Consumer spending, in the meantime, should remain robust amid the region’s strong economic fundamentals. In tandem with developing Asia, other fledgling economies are likely to record varying degrees of recovery. Broadly speaking, market opportunities will be buoyed by an expansion of their consumer markets, although rising inflation is weighing on consumption. 

In Latin America, commodity exporters such as Brazil and Chile should benefit from higher commodity prices. The outlook for Mexico, which is closely tied to the US economy, is expected to be upbeat. 

In contrast, Central and Eastern Europe should remain a weaker area in the global growth picture because of its close integration with the EU. Outside the EU, Turkey, with a better macroeconomic environment, may have better prospects, while Russia is expected to gain from firming oil and commodity prices. 

For MENA, high crude prices should strengthen the economic health of oil exporters. Yet this positive development is overshadowed by a wave of political unrest that has spread through the region since the beginning of the year. The unrest has negative consequences for the regional economies. It also has an indirect impact on the global recovery because of higher oil prices, given that MENA accounts for about one-third of the world supply. 

Hong Kong Outlook

While Hong Kong exports should continue to expand vigorously for the rest of 2011, the pace of growth is expected to moderate somewhat from the surge of the first quarter. 

Looking ahead, the growth of Hong Kong exports should remain decent through 2012, although there are plenty of risks and challenges ahead. 

For more details, see the HKTDC Research report: “Medium-term prospects for Hong Kong exports: sustained recovery amid increasing headwinds,”  which can be order at http://bookshop.hktdc.com/.

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