• Hong Kong's merchandise exports will likely continue to perform well, rising by an expected 9% in value in 2006. Domestic exports and re-exports are expected to increase by 4.5% and 9.5%, respectively.
  
  
• While the US economy will ease and the EU economy will remain in the doldrums, the Asian region is expected to be more promising, with the mainland economy staying strong and Japan achieving a sustainable revival.
  
  
• Continued globalisation will provide another impetus to trade. Regardless of the MC6 outcomes, the momentum of globalisation will be sustained by the existing liberalisation and international trade regime.
  
  
• In general, although the world trade environment will be supportive of Hong Kong exports, a number of downside risks prevail. Increasingly, the risk of a human-to-human bird flu presents a significant potential threat.
  
  
• Product-wise, electronics should continue to be the growth leader. Meanwhile, the agreements struck between China and the US/EU will somewhat reduce the uncertainty hanging over textiles and clothing exports.
  
  
• On the other hand, the macro environment for services exports should remain broadly positive for 2006, due to satisfactory trade prospects for the Greater PRD and continued strength in inbound tourism.

Slowing US and EU Demand but Bright Regional Picture

In 2006, the world economy will continue to expand at a steady pace. According to the IMF, world economic growth is projected to be 4.3%, unchanged from the pace of the current year. But the US economy will ease back into a lower gear. While interest rates have remained at a historically low level, successive rate hikes, along with a less stimulatory fiscal policy and firm energy prices, will eventually affect consumption expenditure. Across the Atlantic, the EU's economic growth will remain hesitant, with stubbornly high unemployment remaining the heaviest burden to consumption. To compound the problem, prevailing protectionism in both the US and the EU will cast a shadow on Hong Kong exports, whereas the weakness of the euro will erode the price competitiveness of Hong Kong products in the EU.

On the upside, Asia is expected to be a vibrant region in the global economic landscape. To some extent, sustained intra-regional trade, mainly driven by sturdy demand from the Chinese mainland, should be able to compensate for some of the impact rippling from the steady global economy and firm oil prices. With the Chinese economic juggernaut powered by still strong exports and solid domestic demand, there are also signs that a sustainable recovery of the Japanese economy is in the pipeline. Seemingly, its post-bubble overhang is close to being undone, and business and consumer confidence is improving steadily. Good appetite from the mainland, facilitated by the implementation of CEPA III and any further strengthening of the RMB, along with stable demand from Japan despite a weaker yen, will certainly benefit Hong Kong exports.

Further Trade Expansion amid Continued Globalisation

Continued globalisation will provide another stimulus to world trade, and in turn to Hong Kong exports. The 6th WTO Ministerial Conference (MC6), which will be held in Hong Kong in mid-December 2005, is instrumental in bringing about further liberalisation and globalisation. A recent World Bank study shows that a successful Doha Round could increase world GDP by US$ 95-126 billion or 0.2-0.3% per year by 2015. Any failure to strike a deal in MC6 will likely lead to bilateralism and regionalism, certainly a backlash for upholding the multilateral trade framework. Yet its real impact on globalisation begs an answer. Most probably, the momentum of globalisation will be sustained by the existing liberalisation and international trade regime, aided further by continued infrastructure advancement in areas like transportation, telecommunication and finance.

Outbreak of Avian Flu and Other Downside Risks

By and large, the world trade environment will be favourable to Hong Kong exports. But a number of downside risks prevail. Increasingly, the possible outbreak of human-to-human avian flu presents a significant potential threat to the global social and economic scene. Thus far, the spread of avian flu has been restricted largely to Asia, and the resulting social and economic consequences have been felt mostly in the rural areas of the affected countries. Though unlikely, if bird flu develops into a human to human pandemic, world trade will be seriously disrupted. If the SARS experiences were any guide, Hong Kong would lose HK$ 90 billion worth of exports, knocking down Hong Kong's annual export growth by four percentage points. Other than avian flu, other downside risks include unfavourable currency movements, rising US interest rates, soaring crude oil prices, an undercurrent of protectionism, as well as persistent security issues.

Likely Performance of Selected Hong Kong Exports

In terms of products, electronics, which has contributed to 72% of Hong Kong's export growth so far this year, should continue to be the growth leader, due mainly to the continued popularity of digital products in overseas market and sustained demand for parts and components from the mainland. Meanwhile, jewellery exports will likely be facilitated by the still healthy demand from high income spenders in overseas markets. Regarding clothing, deals reached between China and the US/EU, affecting around 40% of Hong Kong's re-exports of textiles and clothing of China origin to both the US and the EU, provide some certainty for Hong Kong exporters, although there are concerns that the overall quotas for certain sensitive items are limited, and the quotas allocated to Hong Kong companies are small. In comparison, the export outlook for toys and watches is less promising.

Strategic Implications for Hong Kong's Merchandise Exports

In the US, consumers are likely to become generally more conservative. European and Japanese consumers are also expected to remain largely in favour of prudent spending. Although a sustainable revival of the Japanese economy is on the cards, years of economic hardships have made consumers continue to shy away from ostentatious purchases. In all these markets, consumers are mainly looking for quality but competitively priced products, with value-for-money still the tenet. Yet higher income earners will likely clamour for higher-end items. Hong Kong exporters should thus understand the trends in different markets, and devise their products and pricing strategies accordingly. Moreover, as protectionism is not expected to abate, Hong Kong exporters should monitor regulatory developments and respond properly, covering not only quotas, but also anti-dumping and green regulations.

While making further inroads into traditional markets, especially the reviving Japanese market, Hong Kong companies are advised to develop other potential markets. In this respect, the mainland holds particular promise for Hong Kong companies. Rapid urbanisation, estimated at a level of almost 42%, as well as the growth of a prosperous middle class, consisting of some 420 million inhabitants, continues apace, creating great demand for a wide range of sophisticated consumer goods. Hong Kong exporters should also keep an eye on the exchange rate of the RMB, as it will likely appreciate further in the future. A stronger RMB will of course, erode the price competitiveness of Hong Kong exports originating from the mainland. But enhanced price competitiveness will enable products produced in Hong Kong, which will all become tariff free from 2006 under CEPA III, to be sold to the mainland more easily.

Apart from the mainland market, Hong Kong exporters should further look to other emerging markets around the world for expansion. According to the IMF, economic growth of emerging markets in 2006, though slackening a touch from the current year to 6.1%, is expected to continue to outperform the 2.7% projected for advanced economies. As such, prospects for many fledgling economies are still favourable. For example, Eastern Europe, the Middle East, as well as Southeast Asia and South Asia, are welcome outlets for Hong Kong exporters intending to diversify their markets.

Developments of Hong Kong's Services Exports

While Hong Kong's merchandise exports are anticipated to return to more sustainable, high single-digit growth in 2006, 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 Pearl River Delta (PRD) region 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, while the tourism industry has a direct bearing on Hong Kong's exports of travel services as well as the passenger side of transportation services.

Regarding cargo transportation, direct shipment has become increasingly popular over the past few years, with many Hong Kong manufacturers/traders shipping their products to overseas markets bypassing Hong Kong. Specifically, Shenzhen ports are seen as posing an increasingly formidable challenge to Hong Kong ports. But cargo diversion notwithstanding, Hong Kong still derives very substantial income from offshore trade transactions. For example, trade-related services amounted to HK$ 115 billion in the first nine months of 2005 and HK$ 146 billion in 2004. These services receipts have overtaken transportation services as the largest category of Hong Kong services exports since 2001, and account for about one-third of Hong Kong's total services exports.

While the cost advantage of Shenzhen ports will feature prominently in shippers' choices and lead to continued diversion of sea cargo, Hong Kong's dominance in the air cargo sector looks more secure in 2006 despite the new Guangzhou Baiyun International Airport (GBIA) having been in operation since August 2004. GBIA is widely expected to pose great challenges for the Hong Kong airport over the longer term, although currently it has yet to build up an international flight network that can easily rival Hong Kong as an international airfreight hub in the region.

In another development, CEPA is to enter its third year of implementation from January 2006. Under CEPA III, 23 measures spread across 10 sectors pertain to liberalisation in the services trade. With a total of 27 sectors open, CEPA provides Hong Kong services companies with preferential access to the mainland market and conceivably will have a long-lasting impact on Hong Kong's economic restructuring. The CEPA framework is intentionally designed to help smaller Hong Kong companies. In particular, they can benefit from many CEPA measures that lower the asset, capital, turnover or operational requirements for market entry.

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.