Jake's View

Exports a handy fudge when playing the Hong Kong GDP numbers game

PUBLISHED : Sunday, 18 May, 2014, 3:35am
UPDATED : Sunday, 18 May, 2014, 3:35am

Economic growth slowed to 2.5 per cent year on year in the first quarter - the worst since 2012 - due to sluggish goods exports, the government economist says.

South China Morning Post, May 17

Eeny, meeny, miny moe,
Pick a number by the toe.
If not happy, let it go

They had to let a lot of numbers go this time at Census and Statistic in order to find something upbeat for the press release on the latest gross domestic product figures.

In the end they found one they liked.

The year-on-year growth rate of exports of goods fell from 5.7 per cent in the previous quarter to only 0.46 per cent in the three months to the end of March this year.

There, got it! Now we can blame a slowdown in GDP growth on the export business and then say the exports are showing signs of turning around again in a few months. Well, they could, you know.

The story implies that everything else did better than that overall 2.5 per cent, which was so heavily dragged down by exports.

But then you find that the biggest component of GDP, personal consumption expenditure, showed a growth rate of only 2 per cent, not better than the overall figure but worse. Yes, those mainland tourists did buy a lot but the rules for tallying up GDP say that you must subtract this from the numbers and instead add in what Hong Kong tourists spent abroad. Much the same thing turns up when you look at government consumption expenditure. The growth here was a shade under the overall growth rate figure.

And while gross domestic fixed capital formation (investment) was slightly better at 3 per cent, it was only the government itself that hugely boosted these figures by wasting ever more money on pointless infrastructure projects. The private sector may actually have shown a decline in overall investment.

Put it all together and domestic demand (GDP less foreign trade) shows a growth rate of 2.59 per cent, a mere shadow over the official 2.5 per cent. Why pick on exports as the culprit, then, when, with exports excluded, the picture really looks no better?

I have to assume it is done because exports are convenient. Everything can be blamed on external factors.

There are several things, however, that our statisticians don't tell you about all this.

They say nothing about service exports, which are actually more important to us than goods exports, and they don't mention that the export number only goes into the GDP figure after they have deducted imports.

Most of all, what they don't tell you is that almost 98 per cent of our exports consist of re-exports and all the figures are hazy about how much these actually contribute to our economy.

The formal understanding is we do some residual work on these re-exports before sending them on to their final destination - 16.3 per cent value added, say the latest available figures.

They call this the rate of re-export margin and, if it sounds vague, I think it is deliberately made confusing.

The goods actually go straight from China to the docks and no residual work is done here at all, except to the paperwork, where a profit margin is magically added. The China taxman cannot tax this and ours will not. The goods then proceed on their way tax free.

Let's put this into perspective. We are talking here of a re-export trade worth HK$3.7 trillion a year going through an economy with a GDP of HK$2.1 trillion year. We are talking of money in a nebulous re-export margin, which amounts to almost a third of the size of our economy

Any inclusion of these numbers has to throw all our calculations out of whack when totting up GDP for Hong Kong.

The best thing to do with them is to ignore them when working out our GDP growth rate and look at domestic demand alone.

That gives us a growth rate of 2.59 per cent, which is not bad for a developed economy and better than that of the European Union and the United States. It would still double the size of our economy in just 30 years.