US-China trade war saps confidence among Hong Kong businesses

Sentiment among Hong Kong small to medium-sized businesses has dropped to its lowest levels since the first quarter of 2017, according to new survey

PUBLISHED : Thursday, 18 October, 2018, 5:42pm
UPDATED : Thursday, 18 October, 2018, 11:04pm

The trade war between the United States and China is beginning to weigh on business sentiment among small to medium-sized employers, with overall confidence for the fourth quarter at its lowest level since the beginning of last year, according to a new survey.

Sentiment for the final three months of the year dropped 6.7 points to 43.0 on a quarter-on-quarter basis, in the Standard Chartered Hong Kong SME Leading Business Index, with the largest drop in confidence in the import, export and wholesale area. Confidence had not dipped to that low of a level since the first quarter of 2017 when it hit 41.9, according to the index.

Nearly half of the businesses surveyed said they believed the trade tensions will last for more than one year, the Hong Kong Productivity Council and Standard Chartered said at a press conference on Thursday.

“We can now say with confidence that [small to-medium sized enterprises] SMEs are expecting genuine business deterioration in the foreseeable future, based on much weaker sales and profit margins,” Kelvin Lau, senior economist for Greater China at Standard Chartered, said.

“This is in line with our macro observations, where Sino-US trade outlook uncertainty has already exacerbated market volatility and weakened local confidence, even though real activities have largely remained resilient for now,” he said.

The survey was conducted in the second half of September and interviewed 823 SMEs in Hong Kong.

The decline in business sentiment comes as Standard Chartered and a number of major banks now expect lower growth in Hong Kong next year and have lowered their gross domestic product forecasts.

Hong Kong economy to take a hit amid trade war, interest hikes

The Hong Kong government is expected to release its official third-quarter GDP numbers for the special administrative region in November. The government’s fourth quarter business expectations survey will be released on Friday.

The widest drop in confidence was among businesses in the import, export and wholesale sector, with confidence dropping 12.8 points to 36.8 for the fourth quarter. That was the lowest level since the fourth quarter of 2016.

About 40 per cent of businesses in sector said they had seen a decline in sales as the trade tensions ramped up.

Among them, 46 per cent said that they were taking action to mitigate the impact of the trade war, with 84 per cent saying they were delaying investments. Three out of 10 businesses in the sector were preparing to take mitigation actions, including potential lay-offs.

The outlook also was grim in the manufacturing sector, where sentiment fell 3.7 points to 41.4 for the fourth quarter, and the retail sector, where confidence declined 2.9 points to 45.3 for the final quarter of this year.

Overall, about a quarter of the companies surveyed said they were taking actions to mitigate the impact of the trade tensions, with 70 per cent reducing future investment.

“The impact of the escalating trade tensions on local businesses, in particular the import and export trade, are gradually emerging”, Gordon Lo Siu-chung, director of business management at the Hong Kong Productivity Council, said.

Lo said that small and medium-sized businesses should consider expanding overseas to other parts of Asia or expand their production lines by taking advantage of the Hong Kong government’s dedicated fund on branding, upgrading and domestic sales (BUD Fund).

The fund, started six years ago, has HK$1.5 billion (US$191.35 million) available to support businesses which want to invest in mainland China or in Asean countries. The amount available was expanded to HK$1 million per business for the mainland China or Asean programme earlier this year.

The crash in confidence also comes as Hong Kong’s banks raised local interest rates for the first time in 12 years last month.

The move by major lenders in the city came after the Hong Kong Monetary Authority raised its based lending rate by 25 basis points to 2.5 per cent, in line with an increase by the US Federal Reserve.

Hong Kong’s home sellers cut prices as decade of cheap money ends

Lau said that businesses have been facing dual headwinds of the trade war and rising rates, but the trade tensions have become an “overwhelmingly worrying” in recent quarters.

“It was a big thing when banks in Hong Kong raise prime rates a couple of weeks back, but it didn’t stay very long. Rightly so, we are not talking about an extensive rise anyway,” Lau said. “It’s something that Hong Kong households generally have well anticipated anyway. Up to this point, the interest rate story is not that alarming, not that damaging to confidence.”

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