HKTDC Export Index 2Q21: Exporter Confidence Rises for Fifth Successive Quarter

Marking its fifth consecutive quarterly increase, the 2Q21 HKTDC Export Index rose to 48.7, well up on the 39.0 recorded for the preceding quarter and a world away from the 16.0 scored for 1Q20 in the very early days of the Covid-19 outbreak. Given the sustained nature of the upturn, the expectation is that Hong Kong’s overall export performance will return to continuous growth over the near term.

• In line with this, exporter confidence continues to improve across many of the major industry sectors, with machinery (up by 13.0 points to 55.9) and electronics (up by 9.8 points to 48.8) both outperforming the overall average.

• Tellingly, exporters are also optimistic with regard to the short-term prospects of all of Hong Kong’s major markets. At 50.3, this saw mainland China return to expansionary territory while Japan (49.8), the EU (49.2), the ASEAN bloc (49.1) and the US (49.0) were also all seen as meriting a positive short-term market outlook.

• In line with the recovering sentiment, the Trade Value Index was up by 10.7 points to 57.0 and the Procurement Index was up by 11.9 points to 45.5. Employment sentiment, however, remained subdued, with its associated index down by 1.6 points to 41.6.

• With regard to the Covid-19 pandemic, 56.9% of exporters indicated they had been adversely affected over the past three months, down from 78.2% in the previous quarter. Among the various Covid-related impacts, a reduction in order sizes (66.4%) was cited as the most common downside.

• In terms of upcoming business strategies, a higher percentage of exporters confirmed that they were prioritising moves to ‘develop other product categories’ (up by 8.1 percentage points to 53.8%) and ‘develop the domestic market of mainland China’ (up by 13 percentage points to 49.5%). Some 45.5% also indicated they were looking to develop their online sales channels.

• Among those who have already developed the mainland China market, 42.9% of respondents indicated that more than 40% of their total revenue was now generated from domestic sales on the mainland. As for the obstacles they encountered when developing the mainland China market, the majority highlighted intense competition (81.8%) and the difficulties in identifying suitable local sales partners / distributors (47.4%) as their key challenges.

• Among those that maintained they had no intention of selling into the mainland market, a lack of understanding of Chinese regulatory issues and policies (58.5%) was cited as the primary concern.

• Overall, however, the pandemic remained the key issue for Hong Kong exporters (41.5% of all respondents), with weakening global demand a distant second place at 16.7%.

In the recent months, Hong Kong’s exports grew significantly, largely on the back of the global trading revival and the resumption of production activities. It is now expected that the global economic recovery, as led by Mainland China and the US, will continue to bolster Hong Kong’s export performance. Accordingly, for 2Q21, the HKTDC Export Index rose by 9.7 points to 48.7, its fifth consecutive quarterly increase and an indication that exporters sentiment has recovered significantly since its historic low of 16.0 for 1Q20. Indeed, as the overall index is now encroaching expansionary territory, it is fair to assume that Hong Kong exporters have become notably more optimistic with regard to the near-term outlook.

In line with this, increased confidence was evident on the part of many of the major industries. Overall, machinery was the most promising sector, with its related index showing the strongest rebound, rising 13.0 points to 55.9. In second and third place were electronics (48.8) and toys (45.1), followed by timepieces at 44.6, and clothing at 43.3. Only in the case of jewellery did exporter sentiment decline, with the reading falling by 1.5 points to 40.7.

Turning to the performance of the major markets, the Asian region continued to be seen as having the best prospects. Testifying to this, Mainland China (50.3) returned to expansionary territory, with Japan (49.8) and the ASEAN bloc (49.1) also witnessing an uptick in exporter confidence. Beyond the region, a more positive outlook was also recorded for both the EU (49.2) and the US (49.0), with rebounds of 6.3 points and 2.9 points respectively.

With regard to the prospects of offshore trade (i.e. shipments not passing through Hong Kong, but handled by Hong Kong businesses), exporters were also upbeat, a sentiment that saw the Offshore Trade Index rise to 48.4 from 31.1 in the previous quarter.

In the case of the Trade Value Index, this rose by 10.7 points to 57.0, suggesting the likelihood of an upward pressure on unit prices over the next few months. For its part, electronics (at 58.1, up by 10.6 points) was the most highly rated sector in terms of unit prices, followed by machinery (at 51.5, up by 10.1 points). Despite staying below expansionary territory, an increase in readings was also recorded for toys (up by 4.2 points to 48.9), jewellery (up by 2.9 points to 47.5), clothing (up by 10.2 points to 45.3) and timepieces (up by 5.1 points to 43.6), a trend that indicates the clear possibility of higher unit prices in all sectors in the coming months.

In line with the generally improving sentiment, the Procurement Index enjoyed a further increase of 11.9 points, rising to 45.5 in 2Q21. Overall, machinery recorded the biggest rise (up 29.1 points to 55.6), with the sector, together with toys (47.2) and electronics (45.9), staying above the average. Procurement sentiment with regard to clothing (up by 12.3 points to 35.6), jewellery (up by 5.8 points to 33.3) and timepieces (up by 0.5 points to 28.4) also increased, an indication that procurement activities in all sectors are likely to be on the up over the next few months.

Less positively, the Employment Index experienced a slight decline, dropping by 1.6 points to 41.6. Digging deeper into this, though, employment sentiment in the machinery (45.1), timepieces (41.2) and jewellery (43.1) all actually improved. Hiring confidence in the electronics (41.5), clothing (41.1) and toys (40.8) sectors, meanwhile. remained relatively downbeat, highlighting the possibility of redundancies in the near-term.

It was also apparent that the impact of Covid-19 has been gradually easing over the past few months. Indeed, the percentage of respondents reporting that they had been negatively affected fell from 78.2% in 1Q21 to 56.9% in 2Q21. In another indication of returning confidence, only 18.7% of respondents indicated they held a “very negative” view of the consequences of the continuing crisis, a considerable decrease on the 33.1% expressing the same sentiment in 1Q21. In the meantime, the proportion of unaffected respondents was up by 9.7 percentage points, while the number of respondents to describe the impact as ‘slightly positive’ or even ‘very positive’ was up by 11.6 percentage points to 13% this time around.

Among those that had been affected, reductions in order sizes (66.4%), increased transportation costs (46.4%) and logistics / distribution disruptions (42.6%) were cited as the three most common problems.

As responses to the Covid-19 pandemic, moves to ‘develop other product categories’ (53.8%) and ‘develop the domestic market of mainland China’ (49.5%) were the two most popular strategies for Hong Kong exporters in the first six months of the current year. Among the other strategies to find favour were developing online sales channels (45.5%) and targetting new overseas markets (28.4%). In terms of markets, the ASEAN bloc (25.8%) and Europe (21.3%) were the most popular targets for diversification.

Of those respondents to have already developed the mainland China market, 25.9% indicated that related domestic sales now accounted for “60% or above” of their total revenue. An additional 17.0% of respondents also reported that “40% - less than 60%” of their revenue was derived from the mainland.

According to the 14th Five-Year Plan, mainland China is to adopt a new “dual circulation” development model as a means of stimulating domestic demand, a strategy likely to provide enormous opportunities for Hong Kong businesses. When looking to enter China’s domestic market, however, Hong Kong exporters are advised to stay alert and to prepare for any challenges they may meet. Among those who have already developed or are now looking to develop the mainland China market, intense competition (81.8%), difficulties in selecting suitable local sales partners / distributors (47.4%) and problems with mastering the required sales channels (44.0%) were seen as the major challenges. Furthermore, 40.2% of such respondents reported concerns over counterfeit products and a lack of clarity with regard to mainland domestic sales legislation as likely to deter them.

Among those with no intention of targeting the mainland market, this was most commonly ascribed to uncertainties with regard to the prevailing domestic sales regulations / policies (58.5%). Concerns were also cited with regard to intense competition (57.5%), the difficulties in choosing the right partners / distributors (49.2%) and unfamiliarity with the procedures for securing required licenses / certification (47.2%).

Looking ahead, Covid-19 (41.5%) and weakened global demand (16.7%) continue to be the two major concerns of Hong Kong exporters, although a smaller number also saw problems as likely to emerge from the prolonged China-US trade tensions (13%) and continuing pandemic-mandated border closures (11.6%).

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 pessimistic outlook.