HSBC is slashing Hong Kong's economic growth forecasts for both this year and the next as economists warn the euro-zone debt crisis will continue to hit local exports. SCMP, November 2 In case you want numbers, slashing means that HSBC's emboldened economists have revised their growth forecast for next year down to 4.5 per cent from 5.4 per cent. Slashing, you know, as in taking a big chopper sharpened to a razor's edge and then bringing it sweeping down with all their might to hack their forecasts through the bone, a full 0.9 per cent. Yes, they make big cuts, at this Home for Scottish Bank Clerks. But the reason that I think these economists have been so emboldened (how would they otherwise have dared) is that none less than our financial secretary, John Tsang Chun-wah, gave them a lead last week by turning gloomy in public after the September trade figures showed a 3 per cent year-on-year decline in Hong Kong's exports. What a sad, sad story. But it's the wrong one. To start with, more than 98 per cent of these exports consist of re-exports, which our statisticians define as 'products which have previously been imported into Hong Kong and which are re-exported without having undergone in Hong Kong a manufacturing process which has changed permanently the shape, nature, form or utility of the product'. This is not quite the accepted international definition but a very convenient one as it allows us to pretend that we do at least some work on these products before shipping them out again. We claim, in fact, that we add about 17 per cent added value to them. But don't examine the claim too closely. It implies that we have an export reprocessing industry worth HK$500 billion a year. Look around. Have you ever seen any sign of it? Can you find even HK$500 worth of export reprocessing turnover here? The answer is that mainland exporters find it convenient to evade mainland profit taxes by shipping their goods to Hong Kong at cost and adding on a profit margin only just before they go on the ship. We don't tax them for this mark-up. It has nothing to do with Hong Kong. The authorities in the mainland have gone along with it even though it costs them public revenue. They apparently think it is not worth upsetting relations with Hong Kong for revenue they would probably not collect anyway. What is more, they can pretend that China's trade surpluses with the United States and the European Union are not really so big at all. These were goods exported to Hong Kong, you see, not to the US or the EU. I now refer you to the real picture as shown in the chart. Hong Kong's real merchandise exports - goods actually made here (well, sort of) - are called domestic exports, and they have been falling for the past 20 years. That's the red line in the chart. They amount to only about HK$70 billion a year, which is tiny. This is the equivalent of about 4 per cent of gross domestic product. Net out the required raw material and component imports and the figure would be less than 1 per cent of GDP. As to that bit about 'euro-zone debt crisis will continue to hit local exports', only about 8 per cent of our domestic exports go to Europe, and this is nothing. This figure has been falling steadily for the past five years, much longer than the euro-zone debt crisis. And now, because I like ending with good news, look at the blue line on the chart. It represents our service exports, the new Hong Kong economy, the proof of an enormous transition that passed right underneath the noses of HSBC's economists and they never saw it. These service exports are running at almost HK$900 billion a year, the equivalent of almost half of our GDP and they show little sign of slowing down. Take heart, O ye of little faith.