Strength of currency causes territory exporters to worry
A strong Hong Kong dollar will hit exports as consumers in major trading markets switch to substitutes from low-cost countries, a report by the Hang Seng Bank concludes.
The steep climb of the US dollar - to which the Hong Kong dollar is pegged - will ease local inflationary pressure by cutting the cost of imports.
During the past 22 months the US dollar has surged from post-war lows against major currencies such as the yen and deutschemark to record highs.
Measured against a nominal effective exchange rate index, the greenback has appreciated 20 per cent.
The rise is more pronounced against the yen, where it has surged from 80.6 to 124 - a rise of 53 per cent.
This has led to a corresponding appreciation of the Hong Kong dollar.
During the past 22 months the local currency has risen by more than 50 per cent against the yen and 23 per cent against the mark.
The US dollar has had effective gains of about 8 per cent against the yuan.
The report concludes that the US dollar is expected to remain strong in the coming months because of the relative strength of the United States economy and its stronger corporate performance.
A stronger Hong Kong dollar improves the terms of trade - that is, the ratio of export prices to import prices - but volumes could fall as exports become comparatively more expensive.
This means total export volume growth is expected to average about 10 per cent this year.
Last year the stronger dollar led to a 1.2 per cent fall in import prices and - due to exports relying on imports of raw materials for production - a 0.3 per cent fall in export prices.
Terms of trade improved 1 per cent.
Slower growth in export volumes is expected because the appreciation of the local currency will continue to erode the relative price competitiveness in world markets.
This is likely to be the most pronounced in the Japanese and European markets but exports to the territory's two biggest trading partners, the US and China, will also be hit.
For the US market it will accelerate the trend towards importing Mexican goods, which has been on the rise as a result of the North America Free Trade Agreement.
Other Latin American countries such as Brazil, where the US dollar last year gained 13 per cent against its currency, are also making inroads into Hong Kong export volumes.
For example, Mexico accounted for 9 per cent of US imports of clothing in the first half of last year, compared with about 5 per cent in 1994. During the same period the combined share of Hong Kong and China trade fell from 29.2 per cent to 22.6 per cent.
The report concludes: 'Given the labour-intensive nature of the territory's exports, overseas demand would slow.
'Any deceleration in export growth would in turn dampen domestic consumption and investment, reducing overall economic growth in Hong Kong.'