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HKTDC Export Index 3Q18: Mounting Concerns over China-US Trade Friction

  • The HKTDC Export Index plunged by 18.3 points from its 29-quarter high of 54.1 in 2Q18 to the contractionary territory at 35.8 in 3Q18, the largest quarterly drop since 2Q06 and indicates that Hong Kong’s export growth may have lost some momentum, at least over the near term.
  • Concerns over the slowdown were evident in nearly every sector, including toys (43.6), timepieces (43.5) and machinery (42.5). It was electronics that suffered the biggest overall drop, falling from 55.2 in 2Q18 to 35.4 in 3Q18.
  • Overall, Hong Kong exporters exhibited mixed feelings towards their trade counterparts involved in the current trade friction. While exports to the Chinese mainland remained just in expansionary territory, the US appeared to be far less promising, with its reading of 39.8 its lowest level since 2009.
  • As further evidence of the overall deterioration in export sentiment, the Trade Value Index (44.8), the Procurement Index (45.5) and the Employment Index (47.9) all fell into the contractionary territory.
  • In line with the mounting concerns of exporters, the direct impact of the ongoing China-US trade friction became ever more apparent. One-third of all respondents (36.1%) reported that their export performance had been negatively affected, a substantial increase on the 21.3% in 2Q18.
  • Of those exporters who reported a negative impact from the trade friction, more than half (53%) had seen buyers reduce the size of their orders, while a quarter (25%) reported that they had had to bear the cost of the extra tariffs imposed.

The HKTDC Export Index deteriorated sharply amidst the intensifying China-US trade dispute. Overall, the index plunged from its 29-quarter high of 54.1 in 2Q18 to 35.8 in 3Q18, an 18.3 point fall, the largest quarter-on-quarter drop recorded since the index was first compiled back in 2Q06. This indicates that the growth of Hong Kong’s exports may have lost momentum, at least over the near term.

Chart: HKTDC Export Index
Chart: HKTDC Export Index

Concerns over the slowdown in export growth were evident in all the major industries, with the individual indices firmly in contractionary territory. Toys (at 43.6) was the most resilient sector, followed closely by timepieces (43.5) and machinery (42.5), while jewellery (38.5) maintained the downward slide it has exhibited over recent quarters. It was electronics, however, that showed the greatest deterioration, with its reading dropping from 55.2 in 2Q18, to 35.4 in 3Q18. At 32.8 (down from 43.6 in 2Q18), clothing was another sector to suffer a sizable drop.

Table: HKTDC Export Index
Table: HKTDC Export Index

With regard to their export markets, exporters exhibited mixed views towards their trade counterparts involved in the ongoing China-US trade friction. While exports to the Chinese mainland were expected to stay barely in expansionary territory, with its score of 50.2 the highest among the major export markets, the US appeared to be far less promising, with its reading of 39.8 its lowest level since 2009. It was also noted that many of the other key markets were unlikely to remain unaffected. This saw Japan (48.9) and the EU (43.3) drop back into contractionary territory.

Table: HKTDC Export Index by Market
Table: HKTDC Export Index by Market

In line with the deterioration in export confidence, the Offshore Trade Index dropped back into contractionary territory, falling from 51.1 in 2Q18 to 43.9 in 3Q18. Given that it maintained a higher reading than the overall Export Index (35.8), this suggests that offshore trade – shipments not passing through Hong Kong, but handled by Hong Kong exporters – is likely to outperform the overall export level.

Chart: Offshore Trade Index
Chart: Offshore Trade Index

In general, unit prices are expected to drop over the near term, contributing to a likely decrease in overall export value. As a sign of this, the Trade Value Index fell from its 17-quarter high of 54.6 in 2Q18 to 44.8 in 3Q18, marking the end of the expansionary trend seen over the last five quarters. In terms of individual industries, the unit price of toys (52.5) was seen as the most likely to rise, with its index staying comfortably in expansionary territory. With notably lower indices, reduced prices can be expected in timepieces (45.5), electronics (44.9), machinery (44.7) and clothing (42). This trend will be most pronounced in jewellery, with its reading of 37 the lowest among all the key industries.

Table: Trade Value Index
Table: Trade Value Index

With the Procurement Index dropping from 57.3 in 2Q18 to its latest reading of 45.5, procurement sentiment is likely to suffer as a consequence of the currently pessimistic climate. Although with a lower reading than the preceding quarter (down from 62.9 to 52.1), toys remained the most upbeat sector in procurement terms and the only one to stay in expansionary territory. The remaining sectors were less optimistic, with electronics (46.3), machinery (43.1) and clothing (39) all showing a decline into a more contractionary mindset, a development that suggests demand in these sectors may be sluggish at best over the near term. Other adversely affected sectors were timepieces (39) and jewellery (25), with the latter reporting a nine-quarter low.

Table: Procurement Index
Table: Procurement Index

With the Employment Index edging down from its 30-quarter high of 53.2 in 2Q18, to 47.9 in 3Q18, employment in the major industries is likely to plateau, at best, over the near term. Going against the overall trend, recruitment intentions in timepieces enjoyed an upturn, climbing from 48 in 2Q18 to 50 in the most recent quarter. Timepieces aside, employment levels in the electronics (48.7), toys (47.9), machinery (45) and jewellery (44) are likely to decline following the short-lived expansion of the previous quarter. Recruitment prospects in clothing (40.5) remained the most subdued of all the major industries, a finding in line with its poor performance in the export index overall.

Table: Employment Index
Table: Employment Index

With the China-US trade friction remains unresolved, the heightened level of uncertainty has clearly undermined exporter sentiment. Overall, some 44.5% of respondents were concerned over a likely negative impact on their export prospects, edging up from 42.8% in 2Q18. A further 51.7% remained neutral as to the likelihood of any negative consequences, slightly down from the 55.4% recorded for the preceding quarter.

Chart: What effect do you expect the China-US trade friction to have on your export performance
Chart: What effect do you expect the China-US trade friction to have on your export performance

In line with the mounting concerns of exporters, the direct impact of the ongoing China-US trade friction became ever more apparent throughout the course of the year. This saw more than one-third of all respondents (36.1%) report that their export performance had been negatively affected by the trade friction, a substantial increase on the 21.3% who reported the same findings for 2Q18. Over the same period, however, some 60.8% of all respondents maintained they remained unaffected, a sizable drop on the 77.4% who claimed to have suffered no downturn in the preceding quarter.

Chart: Up till now, what effect has the China-US trade friction had on your export performance?
Chart: Up till now, what effect has the China-US trade friction had on your export performance?

Among those exporters who reported a negative impact on account of the China-US trade friction, more than half (53%) had experienced buyers cutting back on previous order sizes. On top of that, a quarter of all respondents (25%) reported that they had had to bear the cost of the extra tariffs imposed as part of the trade friction. Among the negative impacts reported were cancelled orders (18%), bargaining over prices (18%) and a shift of sourcing away from China (13%). A small number of respondents (4%) also reported that previously-ordered shipments had been postponed.

Chart: How is the China-US trade friction affecting your company?
Chart: How is the China-US trade friction affecting your company?

 

Content provided by Picture: Doris Fung
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