HONG KONG • Hong Kong has long marketed itself as the gateway to China for foreign businesses, especially the United States. With a trade war now raging between the world's two largest economies, that has become a problem.
Having shifted its factories across the border decades ago to benefit from cheaper labour, Hong Kong now finds its role as a trade conduit to be a source of concern.
Products destined for China and the US passing through the city accounted for almost 10 per cent of its roughly US$500 billion (S$690 billion) in exports last year, according to the Hong Kong Trade Development Council.
The import-export business overall represents almost a fifth of the domestic economy, and worsening sentiment on the mainland can spill over into the former British colony in other ways - most obviously tourism spending. Add the trade war threat to an already-inflated property market, and Hong Kong's economy begins to look fragile.
"These are the two biggest traders in the world, and they trade through us with each other," said Mr Nicholas Kwan, director of research at the Hong Kong Trade Development Council (HKTDC). "So when they are fighting, a lot of intermediaries get hurt and we are the most prominent intermediary between these two."
The immediate effect of the worsening of the trade conflict this year is hard to disentangle from already-slowing activity, but it is clear that metrics such as container throughput will continue to suffer if the tariff war drags on.
Gross domestic product grew 3.5 per cent in the second quarter from a year ago, compared with a revised 4.6 per cent in the first, according to government data.
The HKTDC cut its forecast for Hong Kong's 2018 export growth to 3 per cent from 6 per cent after its latest quarterly export sentiment index reading for last month plunged a record amount, from an expansionary 54.1 in the second quarter to 35.8 in the third. Readings below 50 indicate a majority of exporters expect contracting shipments.
The results underscore the gloom surrounding Hong Kong's trade market, especially in the key electronics segment, which suffered the biggest overall drop to 35.4 from 55.2 in the prior quarter, the report said. The sector makes up almost 70 per cent of total merchandise exports.
The trade woes come at a tricky time as the city navigates the impact of a slowing economy in China while borrowing costs are likely to rise due to monetary policy being tied to the Federal Reserve's interest rate hikes, thanks to the city's currency peg.
"We cannot rely on monetary policy," said Ms Iris Pang, Greater China economist with ING Bank NV in Hong Kong. "We have to rely on fiscal stimulus and now is the right time for the Hong Kong government to spend its fiscal money."
Ms Pang cut her 2018 economic growth forecast for Hong Kong to 3.6 per cent from 4.9 per cent in August due to the trade war and may slash her 2019 and 2020 targets as well if the conflict continues, she said. She currently forecasts 2.6 per cent growth next year and 2.5 per cent in 2020. Standard Chartered Bank and United Overseas Bank have also lowered their forecasts for this year.
A weaker domestic economy, higher interest rates and a dimmer outlook could all contribute to a turning point for the territory's real-estate market, among the world's most expensive.