With a growth rate of 4% this year so far, Hong Kong’s economy appears to be flourishing. But this snapshot does not show the full picture, and the dark clouds that have been heaping up on the horizon are moving ominously closer.
The trade tariffs introduced by U.S. President Donald Trump and matched by Beijing have started to be implemented, with worrying implications for the global economy and for Hong Kong in particular.
Hong Kong has long been a conduit into Mainland China. Statistics on trade bear this out: in 2017, HK$277.5 billion worth of goods were exported via Hong Kong from the Mainland to the United States, with the reverse flow being worth HK$73.2 billion. Combined, this represented about 4.3% of Hong Kong’s total trade and 9.1% of total exports for last year. So Hong Kong companies, particularly those in the sectors directly affected, have reason to be concerned.
Impact on Hong Kong
“Right now, what we are hearing from most of our members is that they haven’t seen any direct impact from the trade tariffs,” said Chamber Chairman Aron Harilela. “But it is still early days. Some business owners have told me that the 10% tariff can be absorbed. But if the level goes up to 25% next year as promised, the effects would be much more severe.”
Chamber Vice Chairman Leland Sun noted that the mood among the Chamber’s member companies is not optimistic. “The greatest problem for many of them is the uncertainty and they are holding off on making investments,” he said. “This is of course prudent, but it inevitably slows down growth.”
SMEs are generally taking a wait-and-see approach as it is much more difficult for them to, for example, shift their sourcing to another market. Larger companies have told the Chamber that they are conducting their own assessments to devise contingency plans.
But whatever the size of the company, the uncertainty is affecting corporate decision making. This is already being seen in GDP figures. Hong Kong’s growth slowed to 3.5% in the second quarter, from 4.6% in the first, amid a slowdown in private consumption and investment.
The industries directly affected by the tariffs inevitably have been the first to be hit. Our members in the trading sector expect that overseas buyers will increasingly turn to other Asian regions to source products.
“We are hearing from some manufacturers that they have already seen a decline in new orders from the U.S.,” reported Harilela. “And they are suffering a double whammy, as some buyers in the U.S. have also been offering lower prices.”
The retaliatory actions of Beijing are also affecting Hong Kong businesses with manufacturing facilities in the Mainland, as they often import components from the U.S.
Members in the logistics and warehousing sector report that new enquiries for services and space have dropped. Air and sea freight businesses are increasingly seeing a shortening in the window for the fulfilment of orders.
The trade tensions are also affecting other industries. “In my own sector, hotels, a weaker RMB would likely hit spending by Mainland tourists, which are a huge part of the tourism sector in Hong Kong,” Harilela said.
Meanwhile, the general uncertainty and recent stock market volatility could impact consumer sentiment at home. All of this would weigh on the retail sector.
In the financial sector, the depreciation of the RMB has raised concerns about capital outflow and possibly tightened capital controls in the Mainland. It will also add pressures to Mainland companies to service and repay their U.S. dollar/ Hong Kong dollar debt, potentially affecting the stability of Hong Kong’s banking sector. With both the local stock market value and turnover declining, asset management and investment banking businesses are the most affected.
Visit to Washington DC
In September, the Chairman, along with Chamber Vice Chairmen Leland Sun and John Slosar, accompanied Secretary for Commerce Edward Yau on a visit to Washington DC.
“Our trip to the United States was very interesting and very useful. We realised that many people in the U.S. were not fully aware of One Country, Two Systems, and that the U.S. actually runs a significant trade surplus with Hong Kong,” said Slosar.
“We also made the point that Hong Kong is a separate customs territory, has a separate and independent legal system and is known for rigorous protection of intellectual property rights. I think we succeeded in getting our message across that Hong Kong is a strong supporter of free trade and remains open for business.”
During their visit, the Hong Kong delegation met with people including Senator Steve Daines, Co-Chair of the U.S.-China Working Group; Dave Reichert, Chairman of the Ways and Means Sub-Committee on Trade; and Ted Yoho, Chairman of the Foreign Affairs Sub-Committee on Asia and the Pacific. The Hong Kong visitors also had several luncheons and meetings with businesspeople in Washington.
“During our trip, we got a real insight into the mood among the business community in the U.S.,” Harilela said. “We learned that companies are more concerned about intellectual property infringement than the trade imbalance.”
Since the tariffs were first mooted, economists around the world have noted that such action would be likely to harm U.S. companies and consumers. Tariffs on goods from China imported into the U.S. will cost American consumers roughly US$6 billion a year, according to a study commissioned by the National Retail Federation.
“The people we met in Washington understand that the trade imbalance won’t be resolved with tariffs,” noted Harilela. “However, sanctions and tariffs are the typical blunt tools deployed by the U.S. to deal with international disagreements.”
During the visit, Secretary Yau also had a bilateral meeting with the US Secretary of Commerce, Wilbur Ross, where he emphasised Hong Kong’s rule of law, efficient business environment and highly professional services. He also noted that the trade tensions will have an impact on U.S. businesses operating in Hong Kong.
Alleviating the impact
In the meantime, the Hong Kong Government has taken measures – described by Secretary Yau as a “stronger life jacket” – to help the business community.
Amid concerns that banks may tighten credit, the Trade and Industry Department has enhanced two of its existing funding schemes: the SME Export Marketing Fund and the Dedicated Fund on Branding, Upgrading and Domestic Sales, known as the BUD fund
The SME Financing Guarantee Scheme from the Hong Kong Mortgage Corporation has been enhanced in a number of ways – including an increase in the maximum loan tenure from five to seven years, and the rise in the maximum guarantee amount from $12 million to $15 million.
The Export Credit Insurance Corp has also announced special measures to support Hong Kong exporters, including increased discounts for SMEs and higher credit limits. And the recent introduction of the two-tier profits tax system – a policy HKGCC long lobbied for – will also help SMEs.
“We are very pleased to see the Government has sprung into action,” said Harilela. “SMEs in particular are concerned about the tightening of credit, so this range of measures will help relieve their worry in those areas.”
What can companies do?
There are also a number of ways that businesses, depending on their sector or products, can reduce the impact of the tariffs. Companies could work with their American counterparts to pursue exclusions from the tariffs if they are seen to cause severe economic hardship to the U.S. company or U.S. interests. Products can be reclassified to another category that is not subject to tariffs.
Another option is for businesses to investigate new markets. Companies could seek to find more trading partners outside of the United States and Mainland China, while manufacturers could shift their production facilities to other locations.
“These may seem like drastic options, but in fact they fit in with a broader trend of diversification,” said the Chamber’s Senior Economist Wilson Chong. “Over the past 20 years, the U.S. has become a less prominent market for Hong Kong as other regions such as ASEAN have become more important.”
And the trend of shifting low-skilled manufacturing, in particular, out of the Mainland has been happening for some time.
“The Free Trade Agreement and Investment Agreement with ASEAN signed last year will make it easier for companies to invest in Southeast Asia,” Chong said. “This should be seen not as a knee-jerk reaction to the trade tensions, but part of a longer term trend.”
He added that Hong Kong businesses can also explore the Greater Bay Area as part of their market diversification strategies.
Looking forward
While the current trade tensions are causing concern, it is worth noting that Hong Kong has experienced several major shifts and crises over the past few decades.
“Hong Kong is nothing if not resilient,” said Vice Chairman Sun. “We bounced back from the Asian Financial Crisis and the SARS epidemic. In fact, turbulent times can drive innovative thinking, which leads to the emergence of new products and services.”
And here at HKGCC we are working hard to keep our members informed on the latest developments, and advising the Government on the policies that will best help local businesses.
“Our combined business knowledge and experience is second-to-none, and we have a very deep pool of expertise from among our members to draw on,” said Harilela.
“We will share that knowledge with you, and we will continue to work with the Government to find ways to ensure Hong Kong remains prosperous, productive and a great place to live and do business.”
Expert View
Dr Wendy Hong, Vice President, Fung Business Intelligence
We do not expect that the Sino-U.S. trade war can be resolved anytime soon. Even if China and the United States can reach a ceasefire agreement on the trade-related issues, broader uncertainties and tensions are likely to remain.
The Sino-U.S. trade tensions will have a long-lasting impact on international trade patterns, leading to the restructuring of the global value chain. It is foreseeable that more and more enterprises will shift their final production processes from China to countries where labor-intensive industries still enjoy advantages.
Trading companies in Hong Kong should step up their search for new locations for production and sourcing aside from Mainland China. In fact, with or without the trade disputes, companies need to stay alert to the global trend towards diversifying production and sourcing bases, so being less dependent on any single source.
For Hong Kong manufacturing companies in the Mainland, the trade war will definitely increase uncertainties. However, shifting production completely may not necessarily mean lower overall production costs. An emerging trend is that companies relocate the final assembly to other countries to avoid the extra tariffs, while continuing to use raw materials or intermediate goods produced in China.