19 June 2013
Tracking Hong Kong Exports
Hong Kong exports to the EU may be shrinking, but exports to the Chinese mainland are growing (photo: EyePress)
Despite increasing optimism, the world trade environment has remained challenging.
Growth in the United States has been dampened by fiscal tightening, the European Union faces continued recession and persistent debt problems, and the Chinese mainland economy slowed in the first quarter. The external environment, however, is likely to improve somewhat over the medium term. Hong Kong’s exports are projected to increase by four per cent in value this year, a figure consistent with the previous forecast. A number of factors, however, could negatively impact this outlook, particularly the risk of a renewed global economic downturn, rising protectionism and sustained geopolitical tensions.
Nicholas Kwan, the new Director of Research for the Hong Kong Trade Development Council, says better prospects for Hong Kong traders are likely in the third quarter of 2013
Despite this, Hong Kong exports still grew by four per cent, year-on-year, in the first quarter of 2013, compared with last year’s two per cent decline in the first quarter, though that was followed by increases of two per cent in the second quarter, four per cent in the third quarter and seven per cent in the final quarter.
Hong Kong exports in the first quarter of 2013 were hampered by sluggish demand from traditional markets. Sales to the US and the EU, for instance, fell by one per cent and four per cent, year-on-year, respectively. This decline, though, was more than offset by an impressive showing in the emerging markets. Intra-Asian trade was especially robust, a consequence of the region’s intensive production network and its continuing rise as a market for consumer goods.
Higher labour and raw material costs and staff shortages remain challenges to manufacturing on the Chinese mainland (photo: EyePress)
A slowdown in the growth of the unit value of Hong Kong exports – edging up only by 0.6 per cent, year-on-year, in the first quarter of 2013, compared to a 3.4 per cent rise in 2012 – further contributed to the deceleration in overall sales. Among the factors exerting pressure on export prices was sustained consumer frugality in overseas markets, particularly in the more traditional markets.
Softening oil and commodity prices, amid a stronger US dollar and concerns regarding the global growth outlook, was another critical factor. The recent slowdown in labour-cost increases across the border, following rapid rises over the last couple of years, also played a part in suppressing export prices.
The Renminbi Variable
The renminbi’s recent strengthening, however, has also exerted some upward pressure on export prices. After a brief relapse, the currency resumed its appreciation against the US dollar as of mid-2012, gaining more than four per cent since then, and some 1.5 per cent so far this year.
According to HKTDC survey findings, local production now accounts for 55 per cent of the cost of Hong Kong companies using mainland manufacturing facilities. This means that a one per cent appreciation of the renminbi would translate to a 0.55 per cent increase in production costs, up from 0.5 per cent in 2009 and 0.3 per cent in 2006, with the impact varying across industries.
More than 40 per cent of Hong Kong companies using outsourced facilities in Vietnam plan to expand their investment in the country over the next three years
Among developed economies, the US looks stronger and more resilient. Notwithstanding its slower-than-expected expansion in the first quarter of 2013, the US economy will likely remain on a recovery trajectory nurtured by continuing monetary easing, stronger employment, an improving housing market and gains in asset prices.
Still, deep-rooted fiscal problems will continue to weigh on domestic demand. Many recession-induced consumption habits, including reverting to basics, searching for discounts and opting for low-cost outlets, will likely prevail over the medium term, although better-off shoppers are now more willing to spend.
Because of its protracted sovereign debt crisis, the EU remains the most compromised region. One bright spot, however, is Germany, a country increasingly benefitting from rising demand outside the EU, even though its near-term growth prospects are still blighted by its debt-ridden neighbours.
Overall, fiscal tightening and weak Eurozone fundamentals will continue to cast a shadow over economic growth across the EU. This is despite the fact that the foundations for tackling the crisis, facilitated by continued monetary easing, are gradually falling into place. As a result, consumer confidence will remain weak, and any appetite for imported goods will likely be limited.
Asia’s economic juggernaut, the Chinese mainland, is expected to offer steady and more balanced growth supported by a larger budget deficit and by largely supportive monetary and credit policies. Industrialisation, urbanisation and agricultural modernisation are among the priorities of the country’s new political leadership. It is expected that agricultural modernisation will support overall economic growth, while urbanisation will bolster domestic demand, bringing with it huge opportunities for Hong Kong suppliers.
Stronger mainland demand will help quicken expansion in other Asian economies. Significantly, trade between ASEAN and China will be boosted by the China-ASEAN Free Trade Area (CAFTA), with its growing and consumption-minded middle class.
While Hong Kong suppliers should target the new growth markets, notably Indonesia and, to a lesser extent, Vietnam, with consumer goods, the rise of other low-cost production bases, including Myanmar and Cambodia, is also likely to prove significant. Outside ASEAN, India, although a difficult market, remains a promising destination for Hong Kong exporters.
There is no lack of opportunities for Hong Kong exporters in other parts of the developing world. Resource-based economies should benefit from the expected firming of oil and commodity prices, driven by abundant global liquidity, growing demand from emerging markets and continuing geopolitical tensions.
In Latin America, for instance, commodity economies – Brazil, Chile and Mexico – should hold up well. It’s a similar story in Russia, where economic growth will benefit from sturdy oil and commodity prices, with its recent WTO accession bringing new market opportunities. Russia aside, emerging Europe will remain a weaker region, partly due to its close ties with the EU.
Those economies with healthier fiscal conditions, such as Poland and Turkey, are likely to fare better. In the Middle East and North Africa, Dubai’s role as a trading hub will remain intact amid the social and political unrest affecting much of rest of the region, particularly Iran, Syria and Libya. For Sub-Saharan Africa, where economic growth will continue to accelerate from its low base, Egypt, South Africa, Kenya and Nigeria will remain the respective gateways to the continent’s northern, southern, eastern and western regions.
On the whole, the world trade environment is likely to enjoy some recuperation during the rest of 2013. While the lingering EU debt crisis remains a problem, the US is staging a gradual recovery and Japan looks set to regain some momentum. The mainland economy, although shifting to a lower gear, is also maintaining steady and balanced growth. Sturdy expansion among the other emerging economies is another reassuring and positive factor.
For more on global market trends, please see the June issue of the HKTDC Trade Quarterly.