Hong Kong economy could become a victim of growing trade frictions between China and US, say 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 say 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.

Data from Hong Kong's Trade and Industry Department show that in 2016, imports from mainland China accounted for 48 per cent, or HK$1,916.8 billion (S$323.9 billion), of the city's total imports, while those from the US made up 5 per cent or US$27 billion (S$35.7 billion).

In the same year, 43 per cent, or HK$18.6 billion, of Hong Kong's total domestic exports went to China compared to 9 per cent, or US$470 million, that went to the US.

And the value of goods re-exported through Hong Kong to and from China in 2016 was HK$3,159 billion, or 89 per cent of the city's total re-export trade value.

Some US$36 billion, or 9 per cent, of mainland China's exports to the US and about 7 per cent of US$9 billion of mainland China's imports from the US were routed through Hong Kong in 2016.
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.

For example, Hong Kong has been a funding pool for Chinese corporates with doubled US dollar offshore bond issuance in 2017, 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.She also notes that Chinese tourists accounted for almost 80 per cent of total visitor arrivals in Hong Kong in 2017, up from 55 per cent in 2007.

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.

Global law firm Baker McKenzie's Washington-based partner Rod Hunter points to the fact that China and the US have a large trading and investment relationship and that while they have fundamental differences in economic approach, 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.

Since April last year, the risks of a full-fledged trade war has been "greatly reduced", says Mr Kelvin Lam, HSBC's Greater China economist.

While four of seven contentious trade points were aimed at China in Mr Trump's election campaign, Mr Lam notes that 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.

"In fact, the whole range of collaborations, the lifting of trade barriers on natural gas, soy beans, poultry and US beef and so on, as well as China's commitment to opening up its financial sector after Mr Trump's visit to China in November, confirms that both countries would like to trade more with each other instead of adopting a more antagonistic approach," he says.

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 between mainland China and the rest of the world.

"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. This is an example of how 'one country, two systems' may be of benefit to Hong Kong," says Ms Pang.

As the trade policy environment turns more complicated, lawyer Jon Cowley at Baker McKenzie's tax practice group in Hong Kong says the key to managing trade risk includes preparing for disruptive trade measures, exploring regional and bilateral free trade agreement opportunities and assessing alternative sourcing locations.

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 and these would give an indication of how far the US is willing to go in dealing with China's alleged unfair trade practices.

These decisions relate to the safeguard actions on solar panels and washing machines, the national security investigation of steel and aluminum imports, as well as unfair trade practices investigation of China's technology transfer policies, said Mr Hunter."There has been a lot of noise about US trade policy over the past year. Now we are getting to decision points," he added.

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.