Hong Kong could be victim of US-China trade woes

HK economy will suffer as tensions between its two top trading partners grow: Analysts

Already grappling with a slowing economy, Hong Kong now faces the prospect of ending up as collateral damage as trade frictions grow between China and the United States, its two top trading partners.

Most analysts The Straits Times spoke to said Hong Kong's trade will suffer as a result of growing tension between the two biggest economies in the world. China was the city's largest trading partner in 2016, followed by the US.

Mr Chua Han Teng, head of Asia country risk at BMI Research, says given Hong Kong's heavy reliance on trade, slowing trade activity will drag down headline real gross domestic product (GDP) growth.

Hong Kong's Trade and Industry Department's data shows that in 2016, imports from mainland China made up 48 per cent of the city's total imports at HK$1,916.8 billion (S$323.9 billion), while the US made up 5 per cent.

Exports to mainland China accounted for 43 per cent, or HK$18.6 billion, of total domestic exports in 2016, higher than the 9 per cent to the US.

Of the city's total re-export trade value in 2016, mainland China contributed to about 89 per cent, or HK$3,159 billion.

But there are some who point out that Hong Kong's fortunes are now increasingly tied to China through other areas such as tourism, retail sales and real estate, and they believe these sectors are likely to take a hit as well.

While most analysts agree that the city would inevitably be caught in the crossfire if a trade war - where punitive tariffs are imposed on the imports of goods - were to erupt between the US and China, most say such risks appear to be low.

For example, Hong Kong has been a funding pool for Chinese corporates with US dollar offshore bond issuance doubling last year, says Ms Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, a French bank.

Ms Herrero adds that the value of residential property transactions contributed by Chinese buyers has risen from 5 per cent in 2007 to an average 15 per cent currently and Chinese tourists accounted for about 80 per cent of Hong Kong's total visitor arrivals last year.

While most analysts agree that the city would inevitably be caught in the crossfire if a trade war - where punitive tariffs are imposed on the import of goods - were to erupt between the US and China, most say such risks appear to be low.

Global law firm Baker McKenzie's Washington-based partner Rod Hunter points to the fact that China and the US have a deep trading and investment relationship and that there is too much at stake so a trade war "seems unlikely".

Mr Vincent Chan, head of China macro research at Credit Suisse, believes US President Donald Trump would "at most" impose tariffs on heavy industrial products "mainly to appease his constituents in the US" - a move unlikely to affect China much.

Mr Kelvin Lam, HSBC's Greater China economist, notes that while four of seven contentious trade points were aimed at China in Mr Trump's election campaign, Mr Trump has since decided not to label China a currency manipulator and shown intentions of raising bilateral trade in order to solve trade imbalances.

And should a trade war materialise, Ms Iris Pang, economist for Greater China at ING Bank, thinks Hong Kong may benefit from its re-export function.

"US exporters or importers could use the Hong Kong port to re-export to China or to get imports from China. Secondly, Hong Kong companies can also act as a middleman to facilitate trade between China and US companies," says Ms Pang.

Sino-US trade tension has grown in recent months as both nations gear towards protectionism and observers fear that tit-for-tat punitive tariffs, among other measures, could escalate into a full-scale trade war.

In the weeks ahead, all eyes will be on Mr Trump's series of trade decisions that are due. These include the national security investigation of steel and aluminium imports, as well as investigations of China's technology transfer policies, which indicate how far the US is willing to go in dealing with China's alleged unfair trade practices.

Mr Trump is expected to touch on his plans for an "aggressive trade crackdown" on unfair Chinese practices later this month in his State of the Union address.

A version of this article appeared in the print edition of The Straits Times on January 19, 2018, with the headline 'HK could be victim of US-China trade woes'. Print Edition | Subscribe