A general view shows the skyline and Hong Kong's Victoria Harbour, as seen from the International Commerce Centre (ICC) on May 25, 2018. (ANTHONY WALLACE / AFP)
Hong Kong economic growth slowed in the second quarter, amid a deepening US-China trade conflict and rising interest rates that are weighing on the outlook.
As a key trading hub for the flow of goods, services and capital between the world’s two biggest economies, Hong Kong is vulnerable to second-round effects as China and the US impose tariffs on each other’s products.
While official forecasts show limited impact because the territory isn’t subject to US tariffs on China due to the United States-Hong Kong Policy Act, the worry is that volumes will decline as production and shipping get moved elsewhere in Asia to avoid getting hit by the new duties.
The government maintained its full-year forecast between 3 and 4 percent
"Over 50 percent of trade in Hong Kong is related to Chinese mainland," said Iris Pang, greater China economist at ING Bank NV in Hong Kong. "When China is in a trade war, Hong Kong’s trade, logistic and ports would be negatively affected."
Even before those effects kick in, growth softened from the fastest expansion since 2011 in the first quarter. Gross domestic product grew 3.5 percent in the second quarter from a year ago, according to the government, and compared with 4.7 percent in the first. Growth fell 0.2 percent quarter-on-quarter. The government maintained its full-year forecast between 3 and 4 percent.
If the tariffs on US$200 billion of Chinese goods are implemented, nearly half of Chinese goods re-exported to the US via Hong Kong could be affected, said Edward Yau, Secretary for Commerce and Economic Development. Still, all targeted items from both round of tariffs form only 3.5 percent of total 2017 exports.
Growth is likely to be moderate somewhat in the coming quarters due to higher interest rates and trade wars
Eddie Cheung, Asia Foreign-exchange strategist, Standard Chartered in Hong Kong
The trade threat comes as the city’s port traffic is already in decline. Container throughput shrank throughout the first half of 2018 compared to 2017, amid fierce competition from mainland ports.
Indeed, Hong Kong’s port has lost its place as the fifth-largest container port to South Korea’s Busan this year. "We do not see HK regaining its top 5 spot and expect Busan to extend the lead over HK as the year progresses," said Rahul Kapoor, a Singapore-based transportation and logistics analyst with Bloomberg Intelligence.
Hong Kong’s economy is feeling the squeeze from rising US interest rates, with the Hong Kong dollar peg meaning the special administrative region imports US monetary policy. HSBC Holdings, BOC Hong Kong Holdings and Standard Chartered will raise mortgage rates starting Monday, following tightening of policy by the US Federal Reserve.
Still, there’s plenty of strength in the economy too, with retail sales still strong, albeit slowing, and unemployment at its lowest in 20 years . So barring a slump in the territory’s sky-high home prices, it looks like a moderation, not a growth slump, lies ahead.
"Growth is likely to be moderate somewhat in the coming quarters due to higher interest rates and trade wars," said Eddie Cheung, Asia foreign-exchange strategist at Standard Chartered in Hong Kong.