16 Dec 2010
Hong Kong’s export outlook for 2011: Challenges amid a flooding of international capital
- Given a moderation of the global recovery and the slowing demand for electronics, Hong Kong’s merchandise trade is set to slow in 2011, with total exports projected to grow by 8% in value.
- To facilitate growth, monetary conditions will remain extremely loose in most developed economies. But households still have to unwind their debts, and consumer confidence will remain weak.
- While developing economies should be much stronger, surging inflation and asset bubbles arising from capital inflows are a potential threat, although a flooding of hot money will benefit commodity exporters.
- Product-wise, Hong Kong firms should keep an eye on green products, which are in demand despite economic hardships. Market-wise, priorities should be given to commodity exporters and emerging economies with a large domestic market.
- Meanwhile, certain risks and challenges exist, notably mounting overseas protectionism, renewed appreciation of the RMB, rising raw material prices, as well as increasing labour costs in the Pearl River Delta (PRD).
- Services exports will keep posting a growth in 2011, though the expansion will correct somewhat from the brisk pace in 2010 consistent with the expected moderating growth for merchandise exports.
- Travel service exports will continue to perform well in comparison with other broad service groups. Financial services exports could moderate given the uncertainty over post-IPO fundraising, though new RMB business should provide further impetus to financial service receipts.
Frugality in developed markets despite monetary easing
After a robust recovery in the early part of 2010, the world economy is set to moderate in 2011. To sustain growth, monetary conditions will remain extremely loose across most of the developed world. Especially noteworthy is the US, which has introduced a second round of quantitative easing (QE) to kick-start economic activity. While an expanding QE programme is also probable in the UK, Japan has long been using such an instrument. By contrast, the eurozone doesn’t favour QE. Yet it has injected huge amounts of liquidity into regional banks, and relaxed borrowing requirements. All these unconventional monetary tools will further suppress interest rates, thus lending support to the asset markets. Yet households still have to unwind their debts, not least in the case of the US and the UK, and consumer confidence will likely settle at low levels.
In this setting, consumers in developed economies will largely remain conservative, and their continued cautiousness will remain a deterrent to conspicuous consumption. While consumer demand is expected to grow, focus will again be given to value, functionality and environmental friendliness. On occasion, consumer thriftiness will be somewhat tempered by a desire to buy chic products, notably new digital gadgets. But following the satisfaction of a certain portion of the pent-up demand accumulated during the recession, the appetite for high-tech and discretionary products will likely become modest. Of particular note, the global electronics cycle, mainly driven by developed economies, has shown signs of maturity, although its stay in positive territory will continue to augur well for Asian exports, including those from Hong Kong.
Brighter emerging world in the midst of huge capital inflows
Compared with most developed economies that rely on monetary easing, resurgence in many emerging economies should be much more robust. In particular, developing Asia, spearheaded by China, is poised to exhibit sturdier growth. To a certain extent, sustained intra-regional trade should be able to buffer some of the impact caused by the slower world recovery as Asia has evolved into a sophisticated manufacturing platform, with production processes divided among different production bases, especially for the electronics industry that entails a comprehensive range of work processes. Buoyant intra-regional trade will remain a positive factor for Hong Kong exports, although the favourable impact will likely become less apparent, given a moderation in multiple shipments of intermediate goods against the backdrop of slower final demand.
While developing economies led by Asia should provide a tonic for Hong Kong exports, the emerging world is not risk free. For now, domestic demand plays a more important role in shoring up the emerging economies. But there is still a long way to go before domestic engines become growth drivers. More seriously, surging inflation and asset bubbles, triggered by speculative capital inflows stemming from QE in the US and elsewhere, may bring a more significant threat to the ongoing revival of emerging economies, although commodity exporters should benefit from the ensuing weak US dollar that serves to inflate commodity prices. An influx of funds may also push up their currencies and hence erode the competitiveness of their exports. All these developments are not conducive to Hong Kong exports to the emerging world.
Potential business opportunities: from green products to commodity exporters
As noted, the trend of trading down and going back to basics will again be prevalent in most developed markets. With costs being the prime consideration, value-for-money will remain very much the watchword, thus unfolding great opportunities for well-priced products that are stylish and safe. Interestingly, a number of surveys further show a gradual but unbending shift in consumer preferences towards green products despite the current economic headwinds. In the EU, for instance, a survey by Dresdner-Cetelem Kreditbank indicates that besides product quality, environmental elements have been another main attribute that European consumers are less willing to give up for a cheaper price. In addition to traditional consumer goods, therefore, green products also hold particular promise for Hong Kong exporters and manufacturers.
In contrast to the lukewarm demand from developed markets, good opportunities exist in a number of emerging markets. Holding particular potential are the commodity exporting nations, such as Brazil, Chile, Russia and the oil exporters in the Middle East, which are slated to benefit from monetary easing in developed economies. Of equal importance are the countries with a huge domestic market like China and India that can serve as a cushion against slowing overseas demand. Of interest to Hong Kong, government endeavours to encourage income redistribution and consumption on the mainland, coupled with efforts to transform and upgrade industry structure, will spawn huge demand not only for consumer goods, but also technology, including green technology, that may not be available on the mainland.
Risks and challenges facing Hong Kong suppliers
Apart from slowing global demand and the threat associated with QE, mounting protectionism will continue to be a major risk to the export outlook of 2011. As developed economies experience a period of slow growth and high joblessness, protectionist sentiment will persist. The US, in particular, is adopting a tough stance towards the mainland, evidenced by a slew of antidumping and countervailing actions to restrict mainland products, as well as unyielding pressure to force the mainland to revalue the RMB. This currency issue has played a visible role for years, and is expected to remain a thorn in Sino-US trade relations in the foreseeable future, notwithstanding changes in the US Congress.
On the supply side, Hong Kong companies are faced with a host of challenges due to soaring costs of production and sourcing across the border. First, the vagaries of currency movements will have an important bearing on Hong Kong exports and, above all, the renewed revaluation of the RMB against the US dollar, which is overshadowed by the new QE programme, may further blunt the price competitiveness of Hong Kong products in the course of 2011. While most Hong Kong suppliers still receive US dollar payments for their exports, an appreciation of the RMB means that the part of their production costs settled in RMB would increase in US dollar terms, thus eating into their profit margins.
Rising raw material prices create another problem to Hong Kong exporters. For one thing, commodity prices are likely to remain sturdy amid the weakness of the US dollar. Yet increasing labour costs in the Pearl River Delta (PRD) present the biggest challenge, as workers made redundant during the global recession are reluctant to return to the PRD. Although the situation has improved lately, employers are forced to raise wages for recruiting and retaining workers, and higher wages and labour shortages will likely remain irreversible in 2011. As it remains difficult for exporters to raise prices, their profit margins will be reduced by labour shortages, accompanied by rising material prices and a stronger RMB.
Recommendations for Hong Kong suppliers
Hong Kong exporters must take note of the developments of the global trade environment, as well as potential risks and challenges, when crafting their business strategies. In traditional markets, Hong Kong exporters should adjust their marketing strategies to cater for changed consumer behaviour in the post-recession era. Accordingly, they are advised to pursue product strategies with a balanced mix of price, quality and green elements. Meanwhile, they are advised to diversify into emerging markets, notably commodity producing nations and countries with a large domestic market. Particularly for the mainland, they should also capitalise on the government’s efforts to promote high-tech sectors like environmental protection and new energy, acting as partners to match overseas technology suppliers and mainland enterprises.
In response to overseas protectionism, Hong Kong companies should monitor regulatory and related developments in overseas markets, covering not only trade restrictions affecting Hong Kong exports, but also green regulations that play an increasingly important role in the US and Europe. With regards to soaring production costs, Hong Kong companies should explore the possibility of moving part of their manufacturing activities beyond the PRD into other low-cost provinces and other competitive manufacturing bases in the region outside the mainland. More importantly, they should upgrade their product structure, shifting from simple processing to high value-added activities and high technology. They should no longer maintain a wait-and-see attitude, and be ready to step out of their comfort zone to avoid being crowded out.
Development of Hong Kong’s services exports
After their robust recovery in 2010, Hong Kong’s merchandise exports are set to moderate somewhat in 2011. As a result, Hong Kong’s services economy is expected to expand modestly with service exports making smaller gains in 2011, along with sectors closely intertwined with trading and manufacturing. These sectors will include transportation and offshore trade, which are expected to grow modestly.
In early 2011, airborne cargo service demand will likely fizzle quickly in the wake of the cargo peak expected through the fourth quarter of 2010. Airfreight growth will further normalise with consumer spending in developed countries predictably turning more conservative following the festive seasons.
While Hong Kong is expected to ride high in its competitive race with other Southern China airports, seafreight services will face intensifying pressures from the ports in Shenzhen, which are fast recovering in 2010 and expected to solidify its lead over Hong Kong in throughput terms in 2011.
Although seacargo transhipment will remain a major contributor to the seafreight service demand in 2011, a moderating international export market plus modest growth expected in intra-Asia trade will depress the overall demand for seaborne cargo services. Offshore trade receipts next year will surrender some of the growth amid growing pressures on earning margins for merchanting services.
Travel services exports and visitor arrivals will continue to perform well in 2011. Short-haul markets will be bolstered by a favourable mix of currency appreciation and improved air flight arrangements. Recovery in the long-haul markets will be sustained to an extent, with source markets like Australia, Germany and France generally outperforming the Anglo-Saxon markets. The Chinese mainland’s contribution to overall tourist arrivals and receipts will likely further expand, thanks to the RMB’s appreciation and facilitation measures in allowing Shenzhen people (both permanent residents and non-residents) to visit Hong Kong as individual travellers.
With the global economy bracing for the second phase of the US’s quantitative easing, and Asian countries expected to step up their counteractive and anti-inflationary measures, greater volatilities in the global financial markets are on the cards.
While IPO activities will likely continue apace, with further diversification of listing countries and involved industry sectors, post-IPO activities will likely be overshadowed by continued market uncertainty.
Nonetheless, there will be a greater contribution to financial service exports from the broadening of RMB business scope and increasing participation of overseas institutions and investors, including, for example, regular issues of sovereign RMB bonds by the mainland government in Hong Kong and more bond issues by non-financial multinational enterprises. After the debut of McDonald’s RMB bond issue in May 2010, Caterpillar is reportedly arranging its RMB bond issue in Hong Kong.
In 2011, Hong Kong will likely see the debut of RMB-priced stocks listing on the local stock bourse, and the mainland allowing exchange-traded funds (ETF) constituted by Hong Kong stocks listed on the mainland bourses. While these expected developments will not only increase Hong Kong’s financial service exports, but also strengthen Hong Kong’s role as an international financial centre.
For the Press Release, please go to HKTDC News.