The Trade Development Council expects 8.5% growth in Hong Kong exports this year, despite high oil prices, yuan revaluation and protectionism in overseas markets.

In its Medium-Term Prospects of Hong Kong Exports report, the council's Chief Economist Edward Leung said exports should continue to fare well later this year although the pace of expansion will likely slacken.

"The 12% growth of exports for the first half was above expectations. Despite some signs of moderation in early 2005, the global economic fundamentals turn out to remain healthy," Mr Leung said.

"In particular, the US and the Mainland, taking up a combined 60% share of Hong Kong exports, have been in good shape."

Weak US dollar

The earlier weakness of the US dollar has bolstered the import absorption power of the EU and Japan. Hong Kong's exports to these two markets grew 17% and 12% in the year's first six months. Firmer export prices, up 2% in the first half, also contributed to faster export growth.

"The price increases have been induced by cost factors, including rises in raw material prices, and labour and electricity shortages on the Mainland," he said.

Mr Leung expects export growth to moderate in the remaining half. US consumption and import demand is poised to cool amid an up-cycle of interest rates and surges in oil prices. Hong Kong's export competitiveness in the EU and Japan will also be hurt by a strong dollar.

"But overall, Hong Kong's export performance will continue to be held up by the solid growth of the Mainland's demand for industrial inputs," he said. "A stronger-than-expected global demand for electronics will also be supportive. In the first six months 68% of Hong Kong's export growth was contributed by electronics. This upturn is likely to continue."

3 downside risks

Mr Leung cautioned there remains certain downside risks.

"High oil prices pose a problem for Hong Kong exporters, as consumer confidence and business investment will suffer. The input costs of Hong Kong exporters will also rise further, especially for plastic raw materials and other petrochemical products," he said.

"The recent revaluation of the yuan, which is expected to raise average prices of the Mainland's outward processing exports by 0.6% to 1%, will imply a modest loss in Hong Kong's export competitiveness. Yet there still exists foreign exchange risks for traders. Further appreciation in the future will have a greater impact on Hong Kong exports.

"Protectionism in overseas markets adds another element of uncertainty. TheEU's re-imposition of quotas on Mainland garments, and safeguard measures taken by the US, will drag down Hong Kong's clothing re-exports, but the overall impact will be partly offset by a better showing of domestic exports under outward processing arrangement.