Dismal trade figures loom over Hong Kong

No thanks to a possible slowdown in China's manufacturing sector.

The expenditure breakdown of the GDP release showed that trade-dependent Hong Kong benefitted significantly from the stabilisation in regional trade and the cyclical recovery in China's economic activity, with exports and imports expanding by 4.5% y-o-y and 5.0% y-o-y, respectively, in Q416, according to BMI Research.

However, given that the Chinese economy is still facing structural headwinds, and that the majority of the territory's trade is either bound for or originating from the mainland, Hong Kong's trade prospects are likely to be subdued over the coming months.

Here's more from BMI Research:

For example, we expect the pace of expansion in China's manufacturing sector to moderate as domestic demand declines due to factors such as a cooling property market and slowing car sales.

This will be compounded by an increasingly uncertain external environment stemming from possible protectionist policies from the US and potential political changes stemming from various elections in Europe, which could weigh on export orders.

In addition, the mainland economy's shaky economic fundamentals will likely result in a weakening Chinese yuan against the Hong Kong dollar over the coming months.

The stronger Hong Kong dollar will therefore weigh on the trade services industry and retail sales as mainland tourists find the Special Administrative Region (SAR) an increasingly expensive place to visit.

Indeed, retail sales (in value terms) remained in contraction on a y-o-y basis for the 26th straight month in January, dropping by 0.9%, even though this marked a small improvement from the -2.9% y-o-y registered in December 2016.