Shipping containers at a terminal in Hong Kong. An economist from HKTDC said surging production costs will remain a formidable challenge facing Hong Kong exporters. Nana Buxani / Bloomberg

The Hong Kong Trade Development Council (HKTDC), the city's merchandise trade promotion body, nudged up its forecast of the city's total export sales growth this year to 12 percent from 8 percent, thanks to increased unit selling prices that could partly offset surging costs.

"Export growth is largely due to increases in export unit prices arising from higher production costs, with expansion in volume terms likely to be mild," said Edward Leung, chief economist at HKTDC.

"Although Hong Kong companies managed to raise the unit prices of their exports by 7.6 percent in the first quarter of 2011, some of them have not been able to fully transfer the escalated costs to their customers for fear of losing businesses," he added. "When prices continue to go up, it will affect demand eventually. Surging production costs will remain a formidable challenge facing Hong Kong exporters."

The economist expects to see a unit price rise of 6 to 8 percent this year. However, higher wages and skyrocketing commodity prices are likely to squeeze profit margins further.

In the latest survey covering 500 Hong Kong companies, HKTDC found that 8 percent of respondents said they can pass on the increased costs completely to buyers while 63 percent said they can partly do so. The findings in their first quarter survey were 8 percent and 49 percent respectively.

Trader sentiments were not quite upbeat amid various external uncertainties including the on-going repercussions of the Japan earthquake, political unrest in the Middle East and North Africa and the unfolding sovereignty debt crisis in Europe.

According to HKTDC's survey, the Hong Kong Export Index dropped to 53.8 percent in the second quarter from its last quarterly reading of 55.8, signaling moderate export expansion in the near term, according to Leung.

In Hang Seng Bank's latest Hong Kong Economic Monitor issued on June 11, the bank believes that growth momentum of Hong Kong export sector will enter an easing phase in the coming months.

According to official figures, April exports by sales volume posted a mere 4.1 percent increase, a sharp decline from March's 21.5 percent.

The adverse impacts of the Japanese earthquake and nuclear disasters on global supply chains should be more obvious in the coming months. Moreover, the latest economic indicators, such as the Purchasing Managers' Indices from the US and the mainland, suggest easing momentum, reflecting partly the impacts of high oil prices, according to Hang Seng Bank economists.

The bank's forecast of Hong Kong's total export value growth in 2011 is 15 percent.

The impact of Japan's earthquake on Hong Kong exports could eventually be higher than the initial gauge of 1 percent, said HKTDC's Leung, who emphasized that the assessment of the impact should now factor in elements such as Japan's depressed consumer sentiment.

Japan assumes a key role in the global supply of parts and components for electronics, a sector which takes up roughly half of Hong Kong total exports.

"April's reading showed the impact is significant and expected to last a few months but diminish with the gradual restoration of parts and components supplies from Japan," said Leung.

According to a survey of large manufacturers released by Japan's Ministry of Economy, Trade and Industry in late April, 90 percent of factories in the affected areas will resume production by mid-July.

China Daily

(HK Edition 06/17/2011 page2)