Are there any changes to the Position of Hong Kong?

Hong Kong is long recognized as the most important re-exports centre of China. However, since the mid 1990s, the further opening of China economy led to the rapid development of container ports and related infrastructural facilities in the coastal region. This undoubtedly diverted some of the re-exports business from Hong Kong to other ports in China. Under this background, since trading and logistics industry is one of the pillar industries in Hong Kong, whether there is any change to the trading position of Hong Kong become a question which worth our attention.

In a macro sense, we assessed trading position of Hong Kong based on two sets of data. The first one is whether the pace of re-exports growth in Hong Kong can match the exports growth in the mainland. The second is whether the proportion of trade with Hong Kong to the total trade volume in the Mainland of China has declining. The data showed that there is a strong positive correlation between the trade growth rate of the mainland and Hong Kong, but the pace of re-exports growth slowed substantially since mid 1990s. Also, the trade growth rate in the mainland continues to outpace Hong Kong and the gap is widening started from 1997. Based on the statistics from China Customs, the proportion of trade with Hong Kong to the total trade volume of the mainland is decreasing over the past 10 years. In 1995, the proportion of imports and exports to Hong Kong contributed 6.5% and 24.2% to the total trade volume of the mainland respectively. These two ratios fell to only 1.9% and 16.3% in 2005. As the re-export goods of Hong Kong mainly shipped to or from the mainland and Hong Kong's trade with the mainland are mainly re-export goods (the weighting of Hong Kong's domestic exports and retained imports is very small compared to its total trade volume). Therefore, the above data clearly showed the weakening of the long recognized re-exports role of Hong Kong.

However, the weakening of re-exports position did not represent the same weakening of Hong Kong's trading centre position, as it was time for the Hong Kong offshore trade to boom¹. According to Hong Kong Census and Statistics Department information, the compound annual real growth rate of offshore services exports reached 15.3% between 1996 and 2004 (The annual growth rate was only 4.3% between 1986 and 1995), much higher than the re-exports growth of 8.1% in the same period. In 2003, offshore services trades amounted to 90% of the exports of Hong Kong's merchanting and trade related services. The total value of goods involved in offshore trade was about the same as re-exports since 2002. The value was actually 2% and 3% higher in 2002 and 2003 respectively. Obviously, the lagging of Hong Kong re-exports growth was due to not only the diversion to other ports in China but also the changes of Hong Kong trading structure.

It is worth our attention that though there is some difference between the growths of these two types of trade, they do not replace each other. Both of them continue to grow with the offshore trade expanded at a faster pace. Since 2002, re-exports trade growth accelerated and again outpaced the offshore trade growth. It is believed that the sharp increase of China exports trade explained the faster pace of Hong Kong re-exports growth in recent years. This also showed that the diversion effect from other ports in China was rather limited as China trade continues to grow very rapidly. And the stage of sharp transformation towards offshore trade appears to be coming to an end.

As the statistical methodology and measurement is not consistent between the figures of re-exports and offshore trade, these could not be simply added together. However, the above assessment showed that the weighting of trading activity with Hong Kong should be much higher after we take into account the offshore trade activities. Thus, it is concluded that the intermediary role of Hong Kong has not yet weakened, it is only a change in trading format. Though the transformation might not be carried out voluntarily, it showed the adaptability and competitive edge of Hong Kong.

What are the Implications of Trade Transformation?

Trading and transportation services exports are rather important to Hong Kong's economy. In 2005, it amounted to 65% of total services exports and 23% of Hong Kong GDP. Also, total value added of imports and exports trade industry contributed 21.3% to Hong Kong GDP, and it employed 16.1% of the total workforce. Thus, the transformation of trading activities might have serious impact on the Hong Kong economy as a whole.

In term of the structural changes, the most obvious one is that, with continuous expansion of imports and exports trade, the activities on the ports are relatively weakening. According to Hong Kong Government statistics, the container throughput in Hong Kong grew at a slower rate since the mid 1990s, and the gap with China trade growth widened.

Trade finance is the most direct component between trading and financial activities. The outstanding balance of trade finance registered negative growth during the recession since 1998, inconsistent with the positive expansion of trading activities. However, if we look at its recovery we can identify that trade finance has some positive correlation with both the re-exports and offshore trade growth. Compared with the overall trade performance, trade finance is much more volatile. This means that it has a much higher sensitivity to the interest rate and capital market environment than the economic performance. Within the offshore services trade, merchanting² have the largest weighting which also require lot of capital inputs, like the re-exports of goods. Therefore, offshore trade does not necessarily affect the demand of trade finance, but more researches are needed before a definite conclusion can be made.

It is also worth our attention that the value added of the re-exports and offshore trade activities are not the same. According to the Government figures, the gross margin on re-exports trade reached 17.3% in 2005 while merchanting of the offshore trade only registered a gross margin of 8.6%, just half of the re-exports. The commission rate of merchandising for offshore transactions was just 3.4%³. It is because the activities involved in offshore trade are much fewer than re-exports. The implications are twofold. First, the trading scale becomes more important for the lower margin offshore trade. Second, the demand of offshore trade finance would be more interest rate sensitive. The financing and re-financing ability could be lower than the traditional re-exports activities. Its contribution to the Hong Kong economy and the employment market might also be limited.

What are the Challenges to Intermediary Role of Hong Kong？

The further opening of China economy and the rapid development of the coastal area has not changed Hong Kong's trading centre position. However, transformation in the mainland might still present new challenges in the future.

Hong Kong becomes closely tied with the mainland since it evolved into the key re-exports centre of China. In 2005, the imports and exports trade to the Mainland of China amounted to 45% of the total trade of Hong Kong, far leading the 10% of the US. There are two main characteristics of the relationship with the mainland. The first is Hong Kong's intermediary role is more reflected on China's exports. The proportion of exports (mainly re-exports) to Hong Kong amounted to 16.3% of total exports in the mainland, much higher than the 1.9% of the proportion of imports. This clearly showed the sales and marketing capability of Hong Kong in the international market. The second is the intermediate goods to be processed in the mainland accounted for quite a large proportion of total trade. In the first three quarters of 2005, 38% of the total exports from Hong Kong are intermediate goods for further processing in the mainland while 66% of imports from the mainland are related to those products. In addition, among all the products made in the mainland and re-exported via Hong Kong, 79% are made from intermediary products. This characteristic is the same as the current trading situation in the Mainland of China which is dominated by exporting processing goods.

However, this kind of trading model has led to a number of problems. First, China's economic structure is rather imbalance which mainly relied on exports trade. Second, the low value added and simple processing manufacturing activities rely too much on the foreign skills and technology. Third, processing manufacturing activities seriously affect the sustainability of resource usage and environment protection. Also, the low labour cost might become a source of social conflicts. Fourth, trade conflicts are further intensified. It is expected that the room for the processing manufacturing industry to expand is rather limited. As a result, the transformation of China trading model should be a question about timing only. The overall strategies and the policies of the Central Government are actively pursuing such a transformation, which includes raising the energy savings, environmental protection and technology thresholds for the processing manufacturing industry, lowering the exports subsidies provided to certain low value added industries, importing more technological goods, equipment, resources and consumer goods, etc. Such a transformation will no doubt affect the trading relationship between Hong Kong and the mainland. Hong Kong intermediary function might be weakened if China becomes less relied on its exports driven growth model. The effects on Hong Kong will be even larger if processing manufacturing model in the mainland is under transformation which will lead to the restructuring of the international value chain and supply chain as well.

To sum up, there are two major implications concerning Hong Kong's position as a trading centre. First, cooperation is the overarching principle. Even though the improvement of port facilities in China's coastal area over the past 10 years has created uncertainties over outlook of Hong Kong's trading industry, the intermediary role of Hong Kong has not weakened. On the other hand, it becomes a new driver for transformation of Hong Kong's trading services. Hong Kong also benefit from the economic growth and opening of China. The same situation is expected in the future. It is more beneficial to cooperate with the neighbourhood cities in providing trade services and developing trade between Great Pearl River Delta or Southern China and overseas markets than to compete against each other for port resources or policy benefits. In addition to strengthen ourselves, more works should be done on better infrastructure development, information flow, and joint market development in order to solidify the position of Hong Kong as a trading centre. Second, high value added services are the future direction. As mentioned above, the value added and economic contribution of offshore trade is rather low. Further development might also be restricted by some internal and external constraints. Diversion of offshore trade will take place when the trading services industry in the mainland become more mature. Furthermore, the trade transformation of China, especially transformation of the processing manufacturing industry, will affect both the re-exports and offshore trade of Hong Kong. Under this situation, the trading and logistics industry in Hong Kong should strive for transforming from a bridging role to a coordinating role, e.g. carrying out more high value added supply chain management activities. If Hong Kong can capture those transformation opportunities, it should not only be able to adapt to the future trading environment in China, contribute to the development of China branding products, import key technological capabilities and enhance consumer spending in China, but also strengthen its own position as a trading centre.

Su Zhixin
Senior Economist