In 2005, Hong Kong's merchandise export growth is expected to consolidate and return to a more sustainable pace of expansion than that in 2004, as the twin engines of world growth -- the US and China -- will likely be more restrained. While economic expansion in the US will be dragged by interest hikes, China's macro-economic tightening measures act as a brake on its fast-growing economy. Therefore, the growth in Hong Kong's exports is likely to moderate. The recent slackening of oil prices, for its part, should be a positive development that is likely to help alleviate some previous concerns over the repercussions of an oil crisis. But volatility of crude prices is expected to continue, posing considerable uncertainties over the world economy and in turn affecting Hong Kong's exports. In this setting, total exports are anticipated to rise by 8.5% in value, or 7.5% in volume. Domestic exports are likely to fall by 2% in value and 2.5% in real terms, but re-exports are projected to show nominal and real growth of 9% and 8% respectively.

On the other hand, the macro-environment for services exports should remain supportive for 2005, thanks to the positive trade prospects for the Greater PRD and constructive outlook for the local tourism industry. CEPA, which will be expanded from January 2005, will have a profound and long-lasting impact on Hong Kong services companies' expansion to the mainland market with market access conditions above and beyond China's WTO commitments.

Slowing US Demand and Mounting Protectionism

Hong Kong's export growth to the US market is likely to slow down amid an expected moderation of the US economy. Despite an improving outlook for jobs and wages, personal debt remains at a relatively high level, leaving consumers susceptible to higher interest rates and a possible cooling of the property market. But the potential impact on higher-income consumers is unlikely to be substantial. Given the upturn of the US economy, they tend to look for higher-end but value-for-money items. Meanwhile, the trend towards consolidation among retailers remains in place, and mass merchandisers and discounters continue to be popular. Hong Kong exporters will therefore continue to face downward price pressures, while consumers' appetite for higher-end items is expected to remain sturdy.

In addition to the ordinary economic factors, Hong Kong's export performance will be greatly affected by trade relations between the US and the Chinese mainland. While the passage of the presidential year will to some extent de-politicise trade in the US, protectionism will nevertheless persist. Particularly with the removal of textile quotas from the beginning of 2005, safeguard measures are likely to be a major tool to contain imports from the mainland. Recently, nine petitions against a wide range of textile and clothing products have been filed, affecting over 40% of Hong Kong's re-exports of textiles and clothing of China origin to the US.

Mainland's Macro-economic Control Measures

In the Chinese mainland, the tightening measures now in force, signified by the recent interest rate hike, will undoubtedly have a bearing on Hong Kong's exports. Nonetheless, it is likely that any further interest rate rises will only proceed at a slow pace. In the meantime, while employing tightening measures to slow down the economy and alleviate over-investment, the mainland will however maintain its export momentum so as to ensure a soft landing. Therefore, the direct impact on Hong Kong's exports of China origin should not be significant.

Although mainland imports may slow, especially for items in over-invested sectors, the impact on Hong Kong should not be substantial, as most of these imported items do not go through Hong Kong. Indeed, the mainland's imports from Hong Kong will likely be buffered by export processing activities. About 70% of Hong Kong's imports from the mainland and close to 80% of Hong Kong's re-exports of China origin are related to outward processing.

Other Major Factors Affecting Hong Kong's Merchandise Exports

Apart from the US and China factors, a number of other issues will also play a big part in affecting Hong Kong's exports. On currency movements, the weak US dollar, caused by the US's fiscal and current account deficits, is expected to stay for some time, and this should enhance Hong Kong's competitiveness in general, particularly boding well for Hong Kong's exports to the EU and Japan. On the technical front, the continued popularity of direct shipments from the mainland to overseas markets will further restrain Hong Kong's re-export growth. While sea cargo diversion is expected to ease for a while, the new Guangzhou Airport will pose little immediate threat to Hong Kong International Airport. Yet the fear of substantial air cargo diversion from Hong Kong over the near term appears somewhat overblown, and the global trend towards short product cycle, small order volume, zero inventory and quick delivery time further heightens the reliance on airfreight for exports. On the other hand, a high comparison base this year will tend to retard Hong Kong's export growth in 2005.

Likely Performance of Selected Hong Kong's Exports

In terms of products, electronics should continue to be the growth leader. Exports of IT products , though to a lesser extent, will continue to benefit from overseas demand for replacement and upgrading of computers. While sales of AV equipment will further take advantage of the sustained popularity of digital products, the appetite for electronics parts and components will be stimulated by the continued relocation of production and sourcing activities by multinationals to the mainland. Meanwhile, jewellery exports will still be facilitated by the continued, albeit slower, expansion of the global economy. For clothing, overseas demand will likely remain robust. But the biggest headache is the protectionist undercurrent of importing countries, especially the US. In any event, the abolition of quotas will bring positive benefits, as it will generate new opportunities in the mature markets. As for watches, sales will remain steady. Regarding toys, however, sales will be hindered by a falling birth rate, a growing preference for electronic gadgets, as well as the growing popularity of mass merchandisers which will mean further downward pressures on Hong Kong's exports.

Strategic Implications for Hong Kong's Merchandise Exports

In the US, consumers are likely to become more conservative in general. Yet higher-income earners are expected to maintain their spending binge on higher-end items, although the frugality of general consumers means that mass products will be much sought after. Meanwhile, European and Japanese consumers will largely remain in favour of prudent spending. They are clamouring for, in the main, quality but competitively-priced products, with value-for-money still the tenet. Hong Kong exporters should therefore appreciate the trends in different markets, and formulate their product and pricing strategies properly. Further in the US, as protectionist undercurrents will remain unabated in 2005, what Hong Kong exporters should do is to keep a close eye on regulatory developments and respond accordingly, especially in the case of textiles and clothing.

In addition to traditional markets, which are already highly competitive and only expand slowly, Hong Kong exporters and manufacturers are advised to further diversify into other potential markets. In this regard, the Chinese mainland holds particular promise for Hong Kong firms, which have produced but not sold extensively there. It should be noted that despite appearances to the contrary, the mainland's tightening measures will not greatly affect consumer spending. Instead, the mainland will rely on consumption as a means to cushion their adverse impact on the economy. Interestingly, the ongoing expansion of CEPA is continuing to liberalise the mainland market in a way conducive to its development as Hong Kong's domestic market. The mainland aside, Hong Kong exporters should also locate other emerging markets for diversification, which may cover Eastern Europe, the Middle East, Southeast Asia, as well as India. According to the IMF, economic growth of emerging markets is projected to expand by 5.9% in 2005, against 2.9% for advanced economies.

Developments of Hong Kong's Services Exports

While Hong Kong's merchandise exports may likely return to a more sustainable, single-digit growth in 2005, the macro-environment for services exports should remain supportive for the year. The two factors that have a strong influence over the performance of Hong Kong's services exports, namely trade prospects for the Greater PRD and the state of the local tourism industry, look positive. Trade prospects for the Greater PRD affect Hong Kong's exports of cargo transportation services as well as offshore trade services, whereas the tourism industry has a direct bearing on Hong Kong's exports of travel services as well as the passenger side of transportation services. In particular, the continual expansion of measures to facilitate mainlanders visiting Hong Kong is expected to have a continued, stimulating effect on Hong Kong's tourism income. Thanks to the strong recovery in tourist arrivals, average hotel occupancy for the first 10 months of this year stood at 86%, up 20% from the same period of 2003.

Regarding cargo transportation, direct shipment has become increasingly popular over the past few years, although there are indications that cargo diversion is easing in the near term. In any event, Hong Kong still derives very substantial income from such offshore trade transactions - HK$129 billion in 2003. Income from offshore trade activities has since 2001 overtaken transportation as the largest category of Hong Kong services exports, accounting for about one-third of Hong Kong's total service exports.

Hong Kong's dominance in the air cargo sector, on the other hand, looks more secure in 2005 despite the recent opening of the new Guangzhou Airport. Though likely posing significant challenges to Hong Kong International Airport over the longer term, the new facility has yet to command an international connection network rivalling that of Hong Kong.

In another development, CEPA, with 18 sectors opened from January 2004 and another eight sectors early next year to offer Hong Kong companies with market access measures above and beyond the mainland's WTO commitments, will have a profound and long-lasting impact on Hong Kong services companies' expansion to the mainland market. Additionally, the pace of Hong Kong's economic restructuring will accelerate under CEPA, and more employment opportunities will be created in the service sector over the longer term, many of which will be found across the boundary.

This new report is available at TDC's Retail Outlets. It can also be purchased through the TDC Bookshop section in the TDC's trade portal: info.hktdc.com.

For the Press Release, please go to TDC News & Speeches.