Comment by the Chamber Chief Economist, Ian K Perkin, on the external trade numbers for June 2000 and the first six months of the year, issued today.

Hong Kong's first half merchandise trade performance was quite remarkable, despite the obvious slow down in the pace of growth in the month of June.

Even allowing for the obvious fact that the improvement was powered by a surge in demand for Mainland re-exports through the SAR to the region, the US and some European countries, it was still a solid outcome for Hong Kong.

In fact, it was more reminiscent of the golden days of Hong Kong's trade when China initially re-opened to global commerce in the 1980s than of a modern SAR dot.com economy thrusting itself into the new e-commerce Century,

First, in current dollar terms, both Hong Kong's exports and imports reached record levels in the opening six months of the year, with exports hitting $721.2 billion and imports at $769.9 billion just pipping the 1997 peak of $768 billion,

Re-exports (mainly out of China) also hit a record dollars-of-the-day level at $635.4 billion for the opening six months, although domestic exports (which have been declining for years) did not, at $85.8 billion (still up on last year).

Second, the pace of growth for all segments - 18.5 per cent for total exports for the opening six months, 19.8 per cent for re-exports, 9.8 per cent for domestic exports and 21.5 per cent for imports - was the best since1995.

The growth in re-export trade is hardly surprising given China's own exports surged 38.3 per cent to US$114.5 billion in the opening six months of the year and imports were up 36.2 per cent to US$102.1 billion. Hong Kong had to get its share of that.

More remarkable was the 9.8 per cent increase in the SAR's domestic exports in the first half of the year - the first such rise in five years.

Just how that was achieved is something of a mystery, especially given that Hong Kong's orders-on-hand and industrial production have continued to show declines throughout the whole period, as have domestic export prices.

At the same time, the SAR;s trade deficit increased to $42.5 billion, up from the $25.1 billion deficit recorded in the first half of last year, but down on the $67.2 billion in first half 1998 and the record deficit of $96.5 billion in opening six months of 1997.

Given such a strong performance overall, it is hardly surprising that the Financial Secretary, Donald Tsang Yam-kuen, yesterday declared that the economy would "have a quite impressive performance" in the second quarter of the year.

The strong performance also confirms that there will need to be a significant upgrade of the Chamber's own overall economic forecast for the current year from the present 5.3 per cent rate. A revised forecast is now being worked on.

Of course, the second half of the year is going to see slower trade and economic growth than the first half, if only because the recovery in both external trade and total output began in the second half of last year.

This means that the numbers for the second half of this year will be coming off a much higher base than did the numbers for the opening six months. Deflation, which has boosted real growth, is now showing signs of diminishing.

It certainly will be difficult to maintain the pace of trade growth from here, with a higher base last year and both domestic exports and re-exports already showing signs of a weakening in their recent rapid pace of growth.

The pace of import growth is also faster than total exports, so that the resulting higher merchandise deficit will become a drag on economic growth sometime in the near term future, despite the offsetting services trade surplus.

Much will depend on the whether demand for Mainland goods is maintained in the US, Europe and the East Asian region in the coming months, especially if the US economy continues to slow after the normal summer lull is over.

The big questions hanging over future export demand are still whether interest rates in the US will rise further, whether the US economy and consumer demand are slowing, and whether this will have a direct effect on US imports?

At the same time, the imminent prospect of the Mainland's formal entry to the World Trade Organization (WTO) could to be enough to continue boost Hong Kong and China trade during the remainder of this year and into 2001.

The prospect of a more open China in the near term as a result of WTO entry may encourage more traders from around the world to enter the market sooner rather than later to ensure their position ahead of formal entry.

This could help both exports from and imports to China moving through the SAR.

But it needs to be understood that the pace of growth of Hong Kong exports is likely slow and if there were any downturn in external demand, especially in the US, the rate of growth could slow more dramatically than most people expect.

Some of the lift in imports so far this year would have been due to higher prices on world markets, but they still provide a pointer to somewhat better local demand and a probable further lift in re-exports as a result of the re-processing trade.

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