HKTDC Export Index 3Q20: Exporter Confidence Rallies Moderately While Spectre of Covid-19 Still Looms Large

• The HKTDC Export Index rose by a further 6.9 points to 25.1 in 3Q20, the second consecutive quarter to record an increase. This suggests that exporter sentiment may be moderating somewhat after its record-low of 16.0 in 1Q20. As the overall figure still stayed firmly in contractionary territory, however it is likely that times will remain relatively tough for Hong Kong’s exporters over the near-term.

• It is, however, fair to say that increased confidence was evident across all the major industries, with machinery (at 29.0), toys (27.5) and electronics (25.3) performing above the overall average. Of these key sectors, toys (at 27.5 – up 9.9 points) and timepieces (at 21.6 – up 8.6 points) recorded the largest uptick in optimism.

• Turning to the perceived prospects in individual markets, Japan (46.1) and Mainland China (42.9) continued to be seen as the likely best performers, while the EU (36.0) was viewed as distinctly less promising.

• In line with the overall improving export sentiment, the Procurement Index rebounded by 14.8 points to 25.3, while the Trade Value Index increased marginally by 1.2 points to 32.0. With economic uncertainty clearly persisting, however, exporters are still wary when it comes to recruitment, a sentiment that saw the Employment Index drop by 2.3 points to a four-year low of 39.8.

• With regard to the ongoing Covid-19 crisis, 91.1% of exporters maintained their businesses had been adversely affected over the past three months, with shrinking order sizes (60.5%) the most frequently-cited issue.

• In terms of their response to the pandemic, 29.3% of respondents indicated they had developed online sales channels, while 23.0% reported downsizing their company. Some 22.0% also reported they had cut unit prices, with 20.4% having implemented some form of work-from-home arrangement.

• While the pandemic remained of primary concern, 68.4% of exporters also believed escalating China-US trade tensions could damage their near-term export prospects.

• Overall, though the coronavirus pandemic remained the biggest concern of the majority of Hong Kong exporters (51.5%), followed by diminishing global demand (21.5%) and China-US trade tensions (15.0%).

• Perhaps reassuringly, only 3.6% of respondents were concerned that the removal of Hong Kong’s preferential status by the US might negatively impact on their export activity.

With quarantine measures and travel restrictions gradually being relaxed across the world, global supply chains have begun to stabilise and a degree of production has resumed. Largely on account of the improving supply-chain situation, the HKTDC Export Index rose by 6.9 points to 25.1 in 3Q20, the second consecutive quarter of improvement following a 2.2 point rise in 2Q20. Although this suggests that export sentiment is on the up, as the overall index remained deep in contractionary territory, it is likely that Hong Kong’s exporters will continue to face considerable challenges over the near-term.

In line with this moderate uptick in sentiment, exporters across all the major sectors proved slightly more optimistic over the past three months. At 29.0, machinery remained the most upbeat sector, followed by toys at 27.5, a rebound of 9.9 points from the previous quarter. While electronics stayed slightly above the overall average at 25.3, improved sentiment was also evident in the case of timepieces (up by 8.6 points to 21.6), clothing (up by 8.4 to 21.0) and jewellery (up by 5.4 to 20.1).

Switching the focus to the likely performance of the major markets, exporter perception remained largely unchanged, with Japan (at 46.1) still seen as the most promising market for Hong Kong exports. In second place, up 3.9 points, was Mainland China at 42.9, followed by the US (41.2) and the ASEAN bloc (41.0). Once again, exporters expressed the least confidence with regard to the EU, although its reading did rise by 1.0 to 36.0.

Notably, exporters were more optimistic when it came to the prospects for offshore trade (i.e. shipments not passing through Hong Kong, but handled by Hong Kong businesses), with the Offshore Trade Index rebounding to 21.7 from its record-low of 10.3 in 2Q20.

In the case of the Trade Value Index, while it edged up slightly from 30.8 in 2Q20 to 32.0 in 3Q20, it is likely that unit prices will face continued downward pressure over the next few months. With a reading of 33.3, machinery remained the most resilient sector in terms of trade value, followed by toys (32.7) and electronics (32.6). Languishing at the bottom of the league were timepieces (27.4), jewellery (26.0) and clothing (25.0), readings that more than confirm that price pressures are set to endure over the near-term.

Turning to procurement sentiment, exporters appear to be a little more optimistic with regard to the coming months than they were in the first half of the year, with the Procurement Index climbing from 10.5 in 2Q20 to 25.3 in 3Q20. Toys (28.2) was the most positive sector in procurement terms, followed closely by electronics (26.0) and machinery (25.9). Timepieces edged up by 1.9 points to 19.2, while jewellery showed the biggest rise, rocketing from 2.0 to 18.6. Meanwhile, clothing was the most subdued sector in terms of procurement‑related activity with a reading of 16.3.

While the majority of the subsidiary indexes showed signs of improvement in 3Q20, the Employment Index fell to a four-year low of 39.8 (down from 42.1), a clear indication that recruitment intentions are likely to remain low across all sectors. For their part, while both machinery (45.1) and electronics (39.8) stayed at or above the overall average, they remained well below the watershed level of 50. Recruitment intentions in jewellery (38.2), clothing (38.1) and toys (38.0) were notably downbeat, while timepieces remained the poorest performer overall at 35.6, suggesting the probability of a loss of headcount within the sector.

With incidences of Covid-19 causing massive disruption on a global basis, the vast majority (91.1%) of respondents reported that the outbreak had continued to have an adverse effect on their export performance, largely accounting for the overall 6.4 percentage point quarter-on-quarter drop. More positively, 8.3% of respondents indicated their export levels had not been affected by the outbreak, a 5.8 percentage point increase on the previous quarter.

Of those that had been affected, 60.5% indicated that buyers ordering less was the key challenge, while 22.0% reported difficulties in contacting overseas buyers / suppliers, and 19.2% had orders cancelled. With quarantine measures being gradually relaxed, however, fewer exporters reported distribution problems (17.7% – down from 53.1%) or delayed shipments (9.1% – down from 55.8%).

In terms of crisis response, almost one-third (29.3%) of exporters indicated they had developed their online sales channels, while 23.0% reported they had downsized their overall workforce. A number of more short-term solutions, including lowering unit prices (22.0%) and implementing a work-from-home policy (20.4%) had also been widely adopted.

In addition to the ongoing concerns with regard to the pandemic, many Hong Kong exporters also indicated their wariness with regard to the escalating China-US trade tensions. Overall, 68.4% of respondents believed the trade dispute could prove detrimental to their export performance, a very slight reduction in the 69.8% who had the same conviction in the previous quarter. Of these concerned respondents, 40% indicated they held a “very negative” view of the likely impact of the dispute. This was a considerable increase on the 26.6% who shared the same sentiment in the previous quarter. Despite this, some 31.6% of exporters indicated they expected to remain unaffected by the stand-off between the two economic superpowers.

Looking to the future, the pandemic remains the biggest concern for 51.5% of Hong Kong’s exporters. This notwithstanding, 21.5% see decelerating global demand as their key challenge, while a further 15.0% maintain that the escalating China-US trade tensions may yet prove most damaging. Perhaps surprisingly, only 3.6% of respondents, however, cited the removal of Hong Kong’s preferential status by the US as likely to adversely affect their export performance.

The HKTDC Export Index 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 correspondingly pessimistic outlook.