HKTDC Export Index 1Q22: Erratic Market Environment Dampening Exporter Confidence Further

• In the first quarter of 2022 (1Q22), the HKTDC shrank for the third consecutive period, falling by 12.5 points to 24.7. This can be taken as a clear indication that the prospects for short-term export growth are expected to weaken still further.

• A more optimistic picture, however, was painted by the Trade Value Index. Standing at 52.8, it remained in expansionary territory, despite its reading having dropped from 57.0 in the previous quarter. This robust outcome indicates that unit prices in most sectors will continue to rise in the near term, with the toy and electronics sectors leading the way at 56.7 and 53.5 respectively.

• Across many of the major sectors, exporters remained notably cautious. This saw timepieces emerge as the least positive sector at 19.7, while machinery recorded the largest drop, falling 19.1 points to 25.0. By contrast, at 33.5, the toy sector was the only one to merit an increased read (up by 8.5 points).

• In line with this, many exporters were similarly pessimistic when it came to the near-term prospect of Hong Kong’s major markets, with all the associated sub-indexes declining. Overall, the best performer remained Japan at 45.6, while mainland China recorded the biggest drop, falling 5.5 points to 42.1. For its part, the US dropped 3.8 points to 39.1, an outcome seen as less than promising.

• In line with this general decline in sentiment, the Procurement Index fell 16.6 points to 20.3, while the Employment Index dropped by 3.6 points to 40.4.

• Perhaps unsurprisingly, a majority (93.1%) of respondents indicated that their businesses had been negatively affected by Covid-19 pandemic over the past three months, a rise of 6.1 percentage points on the previous quarter. Among the key negative impacts cited were rising transportation costs (75.7%) and ongoing disruptions to logistics / distribution arrangements (64.5%).

• In light of rising costs, the pricing response from companies has been notably mixed. While 46.8% of respondents indicated they had been able to pass on at least some of their increased costs to buyers, 48.1% maintained this had not been an option. In addition, about one third (34.2%) of respondents expected their profit margins to rise or stay at the same level, while 65.8% predicted their profits margins would fall year-on-year over the course of the next 12 months.

• In terms of strategies designed to boost their competitiveness, the highest proportion of respondents favoured developing other product lines (38.5%), followed by diversifying into new overseas markets (29.9%) and developing online sales / sourcing channels (29.4%). Looking ahead, an increased number of respondents were concerned about the impact of Covid-19 (53.5%) – a significant climb from the 32.5% of respondents reporting the same sentiment in the previous quarter. A further 11.4% indicated that prospects of a stuttering economic recovery remained among their key challenges. The evolving nature of the pandemic and the resultant disruptions to supply chains and transportation on a global basis continue to undermine exporter confidence. As a result, the 1Q22 HKTDC fell to 24.7, notably down from the 37.2 recorded for 4Q21 and the third consecutive quarterly decrease. As the index has fallen further into contractionary territory, it is clear that Hong Kong exporters expect considerable challenges over the near‑term.

It is also notable that positive exporter sentiment has declined across all of the major industry sectors. For its part, the toy sector was the most promising and the only one to return an increased reading (up 8.5 points to 33.5). This was followed by clothing, which was down 11.6 points to 28.0. Less optimistically still, machinery suffered the most substantial decline, falling 19.1 points to 25.0, while electronics was down 12.5 to 24.5 and jewellery down 17.2 to 23.5. Trailing in last place was timepieces, down 17.8 to 19.7.

Exporters were similarly pessimistic with regard to the near-term prospects of Hong Kong’s major markets, with all the related sub-indexes evidencing something of a decline. Overall, Asia continued to be seen as likely to be the best performer over the coming months, with Japan, at 45.6, regarded as the most stable market. Despite declining by a significant 5.5 points, mainland China was placed second at 42.1. Exporters, however, were less confident when it came to their export prospects within both the EU (down 4.4 points to 39.5) and the US (down 3.8 points to 39.1).

In the case of offshore trade (i.e. shipments not passing through Hong Kong but handled by the city’s businesses), exporters were also relatively downbeat. This was clear from the , which was down to 15.1 from 32.6 quarter-on-quarter.

The Trade Value Index, however, offered some cause for optimism. With a reading of 52.8, it remained in expansionary territory despite a 4.2-point fall. This indicates that unit prices in most sectors will continue to face upward pressure over the near term. The most highly rated sector here were toys (56.7) and electronics (53.5), while machinery (48.8) and clothing (46.0) hovered close to the watershed mark of 50. By contrast, timepieces (41.8) and jewellery (37.3) fell far from the expansionary zone, indicating the likelihood of lower prices in these sectors over the near term.

Turning to the Procurement Index, this fell by 16.6 points to 20.3 in 1Q22, a sure indication that procurement activities are set to decrease over the coming months. In line with this, readings in all sectors remained deep in contractionary territory, with timepieces (down 17.3 points to 19.2) proving the worst performer. There was also sizable declines for electronics (down 17 points to 20.0), jewellery (down 16.7 points to 20.6), machinery (down 17.9 points to 22.8), and clothing (down 12.3 points to 24.3). Although the reading for the toy sector rallied slightly (up 4.3 points to 26.1), its overall procurement sentiment remained subdued.

The Employment Index was similarly down, falling 3.6 points to 40.4, suggesting recruitment activities in most sectors are likely to be curtailed somewhat over the near term. Overall, the toy sector (41.5) was the most upbeat, followed by electronics at 40.4. By comparison, employment sentiment in the jewellery (40.2), clothing (39.6) and timepiece (38.5) sectors was notably less robust.

In terms of the major concerns for Hong Kong exporters over the past three months, the still-evolving Covid-19 epidemic continues to predominate, with 93.1% of respondents maintaining that their businesses were negatively affected. Of these respondents, 44.7% indicated their view of the ongoing impact of the outbreak was “very negative”, a significant rise on the previous level of 21.3% expressing the same sentiment in the previous quarter. Correspondingly, only 6.9% of respondents indicated they had not suffered on account of the virus in the past three months, a figure that was down from 13.0% in the previous quarter.

Of those that had been negatively affected, 75.7% cited increased transportation costs as their principal challenge, a considerable increase from the 60.2% highlighting the same problem in the previous quarter. In addition, 64.5% of respondents reported disruptions to logistics / distribution arrangements, while 46.5% had encountered difficulties in sourcing raw materials. Among the other sizable impacts referenced were reduced order sizes (43.6%), increased production costs (42.1%) and communications issues with overseas buyers / suppliers (41.6%).

The pricing response from companies has been notably mixed. Nearly half (48.1%) maintained they were unable to pass on all of these increased overheads to buyers. Some 28.8% of exporters were able to pass on less than 40% of these costs, while only 18% could transfer more than 40%. Just 5.1% of exporters, meanwhile, had not experienced any increase in their production costs.

In line with this, slightly over half of the participating exporters (52.8%) reported that the unit prices of their export products remained unchanged, while some 12.5% indicated they had been obliged to drop their prices. A sizable 34.7% of exporters, however, had increased their unit prices over the past three months, largely in response to soaring transportation and production costs. Typically, this had seen them increase their prices within a range of 1-10%.

As many respondents had kept their unit prices unchanged amid increasing costs, it is not surprising that more than well over half of all respondents (65.8%) expected a decrease in their profit margins in 2022 when compared to 2021. Digging a little deeper, 38.6% anticipated their profit margin to fall by less than 10%, while 27.2% expected a decrease of more than 10%. Despite the challenging situation, some 24.9% predicted that they could maintain their current profit margin, while 9.3% even foresaw improved margins.

In terms of favoured business strategies for this year overall, 38.5% of respondents indicated they were planning to develop other product categories. Among the other options set to be adopted are diversifying sales into new overseas markets (29.9%) and developing online sales / sourcing channels (29.4%). In terms of destinations, the ASEAN bloc (37%) was the most popular target for market diversification.

Looking ahead, the two primary concerns for Hong Kong exporters remain Covid-19 (up by 21 percentage points to 53.5%) and faltering economic recovery (11.4%). Beyond this, 9.3% of respondents also identified ongoing border closures as a major worry.

The HKTDC  is designed to gauge the prospects of the near-term export performance of Hong Kong traders. The business confidence survey is conducted on a quarterly basis, with 500 participating Hong Kong traders from six major industry sectors interviewed. Any Index reading above 50 indicates an upward trend and an optimistic outlook, while any Index reading below 50 indicates a downward trend and a pessimistic outlook.