Hong Kong: Will service exports shine again?

Transcription

1 Jackit Wong Senior Economist Thomas Shik Acting Chief Economist Hong Kong: Will service exports shine again? Since the end of the global financial crisis, Hong Kong s key economic growth contributor has been domestic demand, with lacklustre world trade activity resulting in a negative contribution from external demand. Drilling down, however, there has been a steadily growing service trade surplus in Hong Kong, driven mainly by increasing demand from mainland China. China s 13th Five-year Plan, in particular the Belt and Road initiative, is likely to become a new growth driver of trade in services in Hong Kong, especially in the area of exports of financial and other business services over the medium and long term. That said, muted world trade demand, the US interest rate normalisation and moderating economic growth on the Mainland will weigh on overall external demand in Hong Kong in the near term. December 215

2 Hong Kong: Will service exports shine again? Since the end of the global financial crisis in 29, Hong Kong s key economic growth contributor has been domestic demand, driven by private consumption expenditure, government consumption expenditure and gross domestic fixedcapital formation. External demand measured by net exports of goods and services, (i.e. exports of goods and services minus imports of goods and services) has generally made a negative contribution (Exhibit 1). Lacklustre world trade demand amid the somewhat weak global economic recovery explains why overall external demand has remained subdued in Hong Kong. Drilling down into the details, however, reveals a more complex picture (Exhibit 2). Merchandise trade has recorded a persistent deficit, but service trade has achieved a steadily growing surplus, with each sector accounting for 2-3% of real gross domestic product (GDP) over the period in review. Since the manufacturing sector represents less than 2% of Hong Kong s real GDP, in contrast to the services sector at over 9% 1, it is not surprising that Hong Kong is a net importer of goods. Exhibit 1: Contributions to Real GDP Growth Exhibit 2: Net exports of goods & services Percentage points 1 After global financial crisis 1 Share of GDP (%) 3 After global financial crisis Net exports of services 1-1 Net exports of goods as of Q3 domestic demand external demand Source: CEIC as of Q3 Source: CEIC -2 1 For Hong Kong s real GDP by economic activity in 214 (the latest data available), services represented 91.% of the real GDP, followed by construction (4.1%), electricity, gas and water supply, and waste management(1.6%), manufacturing (1.4%), and agriculture, fishing, mining and quarrying (.1%). Note that the sum of all economic activities is not equal to 1%, due to taxes on products and statistical discrepancies. December 215 2

3 HKD billion HKD billion Two primary factors have driven strong growth in Hong Kong s service exports relative to its service imports (Exhibit 3): 1. Hong Kong s economic position: As one of the world s most externally oriented economies and a key international financial centre, Hong Kong has competitive advantages in trade and financial services. Over 9% of real GDP now comes from services. 2. Implementation of the Mainland policies: With the growing economic integration between Hong Kong and the Mainland, Hong Kong s service trade exports have been driven in part by increasing service demand from the Mainland, supported since the early 2s by initiatives such as the Closer Economic Partnership Arrangement (CEPA) and the Individual Visit Scheme (IVS). Service exports from Hong Kong to the Mainland have increased more than fourfold in 1 years from HK$69.2 billion in 23 to HK$317.1 billion in 213. In 213, trade in services 2 between Hong Kong and the Mainland amounted to HK$ billion, representing 4.6% of the total, while other key trade partners for services were the US, the United Kingdom, Japan and Taiwan (Exhibit 4). Exhibit 3: Hong Kong s service exports and imports Exhibit 4: Hong Kong s trade in services with major trading partners in 213 1,2 1,2 1, 1, Exports of services Imports of services Germany 2.8% Australia 3.1% Singapore 3.7% Taiwan 4.2% Japan 5.5% Others 21.1% UK 5.9% US 13.1% China 4.6% Source: Census and Statistics Department Source: Census and Statistics Department As the Mainland is Hong Kong s leading trade partner for services, China s 13th Five-year Plan is likely to structurally affect the service trade in Hong Kong in the medium and long term. 2 Trade in services here refers to the sum of the values of total exports and imports of services. December 215 3

4 China s 13 th Five-year Plan China s 13 th Five-year Plan, the economic and social development blueprint for the five-year period from 216 to 22, will be endorsed at the National People s Congress meetings in March next year. The Proposal on Formulating the 13 th Fiveyear Plan (Proposal) adopted at the 5 th Plenary Session of the 18 th Communist Party of China Central Committee in late October this year, followed by Chinese President Xi Jinping s explanation, have already provided some key information that attracted wide market attention (Exhibit 5). Exhibit 5: Key takeaways from the Proposal and President Xi s explanation Area Context Key target (in figure) Overall objective To build a moderately prosperous society by 22 Growth target Urbanisation Poverty relief Child policy To maintain medium-high economic growth To double 21 GDP and the per capita income of both urban and rural residents by 22 To reform the household registration system (known as hukou ) To lift all poor people out of poverty by 22 As of the end of 214, China had 7.17 million people in rural areas living below the poverty line (established at an annual income of RMB 2,8 by 214 price standards) To allow all couples to have two children Currently, couples are only permitted to have two children if at least one of the couple is an only child As of August 215, only 15.4% of the more than 11 million eligible couples had applied for having a second child, and over 15% of the population is now 6 or more years old For the period, annual growth must be at least 6.5% By 22, about 45% of the whole registered population will be living in urban areas (from 35.9% in 213) 1 million people will be lifted out of poverty every year from 216 to 22, while the social security system helping those living above the poverty line will cover the remaining 2 million poor people who are unfit to work N/A Financial reform To speed up financial reforms N/A Green development To embrace green development N/A Opening up To encourage domestic firms to invest overseas and attract foreign investment and to promote the Belt and Road initiative N/A Source: Xinhua News Agency N/A: Not applicable In considering the future prospects of Hong Kong s service trade to write this paper, we specifically focused on the section of the Proposal dedicated to Hong Kong under the heading of Opening Up some key points of which are extracted in Exhibit 6. These points are broadly similar to those outlined in the comparable section in the 12 th Five-year Plan, with the only real difference being the focus on the Belt and Road initiative. December 215 4

5 Exhibit 6: Key points from the Proposal in relation to Hong Kong Overall objective To deepen cooperative development between the Mainland and Hong Kong Key focuses To reinforce Hong Kong's status as an international centre for financial services, trade and shipping To participate in the Mainland s two-way opening-up policies, in addition to the Belt and Road initiative To strengthen Hong Kong s position as a global offshore renminbi business hub, as well as to promote financing, trade,logistics, professional services and other high-value-added services To deepen Guangdong-Hong Kong-Macau cooperation by speeding up the development of Qianhai, Nansha, Henqin etc., together with strengthening exchanges and cooperation in areas such as technology, culture, education and environment protection Source: Xinhua News Agency Belt and Road Initiative and Hong Kong s service exports The Belt and Road initiative, also known as the One Belt, One Road initiative, is a large-scale project initiated by the Chinese government to further integrate itself into the world economy in areas such as transport infrastructure construction, investment and trade facilitation, financial cooperation and cultural exchange 3. The project is comprised of two parts that collectively encompassing more than 6 countries: the New Silk Road Economic Belt, which will link China with Europe through Central and Western Asia; and the 21 st Century Maritime Silk Road, which will connect China with Southeast Asia, Africa and Europe. Based on our initial assessment 4, there are a number of service export-related areas that Hong Kong could potentially capitalise on under the Belt and Road initiative. These include: 1. The provision of exports of financial services by issuing debt, such as Islamic bonds and renminbi-denominated infrastructure revenue bonds, as well as offering equipment, aviation and shipping finance. 2. The provision of exports of other business services, such as professional arbitration services, project consultation services and market research services. 3. The provision of exports of trade-related and travel services by offering logistics services and hosting international conferences. 3 According to Xinhua Finance Agency, these four areas were highlighted by Chinese leaders at a February 215 conference that was focused on the Belt and Road initiative. 4 Hang Seng Bank, Hong Kong Economic Monthly, April 215. December 215 5

6 HKD billion Hong Kong s trade outlook In the near term, muted world trade demand, a stronger Hong Kong dollar (resulting from US interest rate normalisation and Hong Kong s Linked Exchange Rate System), and moderating economic growth on the Mainland will weigh on overall external demand in Hong Kong. Looking to the medium and long term, China s 13th Five-year Plan, in particular the Belt and Road initiative, is likely to structurally affect Hong Kong s services trade. Trade-related services For net exports of services by service component (Exhibit 7), trade-related services will likely remain the largest service group, although risk will be tilted to the downside. The Belt and Road initiative is likely to boost the volume of merchanting services, thereby supporting offshore trade earnings that have been under pressure, amid a decline in the rate of gross margins 5 for merchanting services from 8.5% in 23 to 5.6% in 213 (Exhibit 8). That said, further development and liberalisation initiatives on the Mainland might reduce Hong Kong s middleman role. Exhibit 7: Hong Kong s net exports of services by service component Exhibit 8: Hong Kong s offshore trade rate of gross margins for merchanting services Others: financial and other business services Trade-related Travel Transportation % as of Q3 Source: Census and Statistics Department Source: Census and Statistics Department Financial services and other business services Net exports of financial services and other business services, which represented only 5.2% of real GDP in 215 (as of the third quarter), appear to have the highest 5 Rate of gross margin refers to the gross margin from merchanting expressed as a percentage of the sales value of goods involved. December 215 6

7 growth potential under the Belt and Road initiative. For exports of financial services, the ongoing financial reforms and opening up on the Mainland will create both opportunities and challenges for Hong Kong. Under the Belt and Road initiative, renminbi financing and Islamic financing are likely to dominate. As the world s largest offshore renminbi centre and a major gateway to the Mainland, Hong Kong has the potential to benefit from first-mover advantage in meeting increasing demand in offshore renminbi financing needs. However, the city is likely to face stiff competition from London and Singapore, which have also leveraged their strong financial infrastructure and large pool of experienced financial professionals to establish themselves as significant offshore renminbi hubs. The UK and Singapore are also founding members of the Asian Infrastructure Investment Bank 6, which is continuing to build closer economic ties with the Mainland. Hong Kong has been working on establishing itself as an Islamic finance hub since 27, although progress has been relatively slow so far. While the anticipated increase in Islamic financing needs under the Belt and Road initiative will likely give a boost to Hong Kong in this regard, in similar fashion to offshore renminbi financing, there will be significant interest from global Islamic finance centres such as the United Arab Emirates and Malaysia, as well as the UK, in seizing the new opportunities that arise. Against this backdrop, the role of the Hong Kong Government in providing support for financial services such as cross-border leasing and export-credit insurance will be crucial to bolstering growth in these areas. There is also likely to be growing demand for new derivative and wealth management products for both risk management and investment purposes, in the face of the increasing global interest in the Mainland s financial markets. As capital markets in Shanghai and Shenzhen become more developed and established, there could be fewer Mainland companies (including both red-chip and H-share 6 Asian Infrastructure Investment Bank (AIIB) is another Chinese government s initiative. AIIB is expected to be in operation early next year, and will focus on the development of infrastructure and other productive sectors in Asia December 215 7

8 companies 7 ) listing in Hong Kong, but this trend has yet to emerge (Exhibit 9). Exhibit 9: Hong Kong s Main Board: Number of newly listed companies by stock type Red-chip H-share Others as of Q3 Source: Securities and Futures Commission For exports of other business services, Hong Kong s well-established legal system, in addition to its large pool of experienced legal professionals and arbitrators, will likely play a significant role in meeting the demand for dispute resolution services related to the Belt and Road initiative. Travel services Net exports of travel services, which represented 4.3% of real GDP in 215 (as of the third quarter), will likely benefit from a growing demand for convention and exhibition services. Summary Overall, China s 13th Five-year Plan, in particular the Belt and Road initiative, looks set to serve as a new growth driver for trade in services in Hong Kong, with exports of financial and other business services among the greatest beneficiaries. 7 H-share companies refer to companies incorporated on the Mainland and listed on the Hong Kong Stock Exchange, while redchip companies refer to Mainland-based companies that are incorporated internationally and listed on the Hong Kong Stock Exchange. December 215 8

9 Hong Kong Economic Monitor Statistics December 215 GDP Retail Sales Nominal Real Value Volume Exports External Merchandise Trade HKD bn yoy (%) yoy (%) yoy (%) HKD bn yoy (%) HKD bn yoy (%) HKD bn (%) yoy (%) 21 1, , , , , , , , , , , , , , , (F) NA , , (F) NA Imports Trade Balance Unemployment Rate (s.a., average) Inflation (average) Q Q , Q , Q , Q Q , Q , Jun 215 NA NA Jul NA NA Aug NA NA Sep NA NA Oct NA NA YTD 1, , , Total Deposit (period-end) RMB Deposit (period-end) Total Loan (period-end) Money Supply (M3, periodend) Residential Property Price (period-end) Tourist Arrivals HKD bn yoy (%) RMB bn yoy (%) HKD bn yoy (%) yoy (%) Index YTD(%) ' yoy (%) 21 6, , , , , , , , , , , , , , , , Q , , , Q2 9, , , Q3 9, , , Q4 1, , , , Q , , , Q2 1, , ,97.5 Q3 1, , , Jun 215 1, , , Jul 1, , , Aug 1, , , Sep 1, , , Oct 1, , NA , YTD 1, , NA , (F): HASE forecast; yoy: year-on-year; YTD: year-to-date; s.a.: seasonally adjusted; bn: billion; NA: not available Source: Census and Statistics Department, Hong Kong Monetary Authority, Rating and Valuation Department, Hong Kong Tourism Board, Macrobond, CEIC, and Hang Seng Bank December 215 9

10 GDP Growth (yoy) Consumer Price Index (yoy) Unemployment Rate (s.a.) Retail Sales Value (yoy) External Merchandise Trade (yoy) Residential Property Price Index (1999 = 1) December 215 1

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