HKTDC Export Index 1Q19: China-US Trade Talks Prompt Improved Exporter Sentiment

• As a sure sign of improving exporter sentiment, the HKTDC Export Index rebounded to 39.2 in 1Q19, a four-point increase on the 35.2 recorded for 4Q18, an eight-quarter low.

• Increased confidence was evident across all the major industries, with machinery (42.2) remaining the most promising sector, followed by toys (41.4) and electronics (39.7). The strongest rebound, meanwhile, was demonstrated by toys, with positive sentiment rising from 24.3 in 4Q18 to 41.4 in 1Q19.

• In terms of individual markets, exporters anticipated improved prospects in all the major export markets. Overall, Japan (48) and the EU (47.4) enjoyed the most positive short-term market outlook, followed by the US (46.1) and Mainland China (45.7).

• In another indication of improving sentiment, the subsidiary indexes also rallied in comparison to the previous quarter, including the Employment Index (48.9), the Trade Value Index (45.9) and the Procurement Index (44).

• With China-US trade friction seen as a major threat to Hong Kong’s overall export performance over the near term, some 48.5% of respondents reported they had already experienced a negative impact, particularly in terms of reductions in order sizes.

• That aside, Hong Kong exporters were slightly more optimistic as to the likely consequences of the trade dispute. This time around, some 51.7% of all respondents expected their export performance to be negatively affected over the near term, compared to 54.4% in 4Q18.

• In terms of Brexit, should the UK actually depart the EU on 29 March, the vast majority of respondents (82.9%) expected their export performance to remain unaffected over the near term.

Following the abrupt change in exporter sentiment in the second half of 2018, the trade negotiations between China and the US, which began in early December, seem to have occasioned a degree of optimism with regard to a resolution to the dispute.

As a sign of this, the HKTDC Export Index rebounded to 39.2 in 1Q19, a four-point increase on the 35.2 recorded for 4Q18, an eight-quarter low.

Despite staying in contractionary territory, exporter sentiment also improved across all the major industries. Machinery remained the most promising sector, with its reading climbing to 42.2, the highest of all the major industries. Toys, which plunged to its lowest level for nearly 10 years in the preceding quarter, exhibited the strongest rebound, rising to 41.4 in 1Q19, a 17.1-point increase on its 4Q18 performance. Electronics, meanwhile, accounting for nearly 70% of Hong Kong’s total exports, stayed slightly above the overall average at 39.7. Improved confidence was also in evidence with regard to the other major industries, including timepieces (35.5), jewellery (33.5) and clothing (32.3).

As for the performance of individual markets, exporters anticipated improved prospects in all the major export markets. Seen as largely immune to the effects of the on-going China-US trade dispute, Japan and the EU were regarded as having the most positive short-term market outlook, securing readings of 48 and 47.4 respectively. Many of the exporters who were previously evidently concerned as to the prospects of the US market also proved more optimistic, resulting in the corresponding index rising 4.6 points to 46.1 in 1Q19, with Mainland China close behind at 45.7.

In contrast to the general improved sentiment, offshore trade – shipments not passing through Hong Kong, but handled by Hong Kong exporters – is seen as likely to underperform when compared to the overall level of exports over the near term. As a sign of this, the Offshore Trade Index fell to its lowest level for eight quarters in 1Q19, dropping by 15.2 points from 48.7 in 4Q18 to 33.5 this time round.

The Trade Value Index, however, edged up to 45.9 in 1Q19 from 44.8 in 4Q18. More specifically, toys bounced back into expansionary territory at 55.7, indicating the possibility of upward pressure on toy prices over the near term. Staying in contractionary territory, though, were machinery (47.5), electronics (46.3), timepieces (44) and jewellery (43.5). Among the major industries, clothing, with the lowest reading of 39.5, was seen as the least likely to witness price increases over the short term.

Turning to procurement sentiment and this has rallied somewhat, with the Procurement Index edging up to 44 in 1Q19, from 43.4 in 4Q18. Most impressively, toys returned to expansionary territory at 55, recording the highest figure for all the major industries. Timepieces and clothing – both seen as expansionary in the previous quarter – retreated to 46 in 1Q19. Electronics rebounded from its seven-quarter low of 42.2 in 4Q18 to 43.6 in 1Q19, followed by machinery (43.1). Jewellery remained the most subdued in procurement terms, but still exhibited a four-point increase (to 38) in 1Q19.

Looking at the Employment Index, this rose to 48.9 in 1Q19, up from 46.6 in 4Q18, indicating likely improvements to the job market. Recruitment intentions in electronics were seen as a little more positive, rising from 47.8 in 4Q18, to 49.7 in 1Q19, taking them to a touch below the watershed level of 50. This was followed by toys at 47.1. Clothing, the most downbeat sector in terms of employment expectations in the preceding quarter, rose to 46 in 1Q19, overtaking a number of the other major industries, including machinery (44.4), timepieces (43) and jewellery (42).

Tellingly, China-US trade friction was seen as likely to remain a major threat to Hong Kong’s overall export performance over the near term. In line with this, some 48.5% of respondents reported that they had already experienced a related negative impact. More positively, the same proportion of respondents maintained they remained unaffected by the dispute to date.

According to those exporters who indicated they had been negatively affected by the dispute, buyers purchasing less per order was the major issue impacting upon their businesses, with over half of all such respondents (69%) citing this particular issue (up from 65.8% in 4Q18).

Smaller order sizes apart, this quarter saw exporters less concerned about other potential downsides, with fewer respondents citing price bargaining (34.9%), cancelled orders (22.7%) and incurring tariff costs (16.2%) as among their primary worries.

In order to counter any possible negative knock-on effects triggered by the China-US trade dispute, Hong Kong exporters have adopted a variety of different strategies and solutions, particularly with regard to long-term diversification. This has led more than half of all respondents (54.1%) to consider developing markets outside the US, while some 27.4% have looked to identify alternative production / sourcing bases.

In contrast, many of the short-term technical tactics on offer proved to have little appeal for Hong Kong exporters. As a clear indication of this, less than 3% of respondents have initiated tariff engineering or tariff exclusion procedures in the wake of the dispute.

Looking ahead, Hong Kong exporters have become slightly more optimistic as to the likely consequences of the China-US trade dispute. In line with this, about half of all respondents (51.7%) were concerned that the dispute might negatively affect their export performance over the near term, compared to 54.4% in 4Q18. Meanwhile, the percentage of exporters who didn't see the dispute as likely to impact negatively on their businesses had also slightly increased, rising to 45.2% in 1Q19 from 42% in 4Q18.

In terms of Brexit, should the UK leave the EU on 29 March, the vast majority of respondents (82.9%) did not anticipate that their export performance would be affected over the near term. In fact, only 16.2% of respondents had any concerns that Brexit could impact upon them adversely.

The HKTDC Export Index is designed to gauge the prospects of the near-term export performance for Hong Kong traders. With a reading above 50, the Index indicates an upward trend and an increase in confidence.