Hong Kong Logistics: Dual Circulation Supply Chains Assessed

Hong Kong is Asia’s leading logistics hub, through which many companies deliver goods to and from mainland China and other countries and territories around the world. In the Outline of the 14th Five-Year Plan for National Economic and Social Development of the People's Republic of China and the Long-Range Objectives Through the Year 2035 (the 14th Five-Year Plan, Chinese only) issued in March 2021, the “dual circulation” development paradigm was put forward in which “domestic and overseas markets reinforce each other, with the domestic market as the mainstay.”

China is set to promote the development of high-tech industries, increase domestic demand, and continue to enhance its global trade network. Hong Kong, as an important logistics hub in the region, is well placed to capitalise on supply chain opportunities emerging from the dual circulation policy, which in turn will strengthen the city’s position as an international shipping, trading and aviation centre.

This article analyses Hong Kong’s trade statistics during the period 2010-2020, highlighting the categories and transportation modes of Hong Kong’s merchandise imports and exports, as well as Hong Kong’s functions, roles and advantages in regional supply chains. It is hoped the analysis will help chart the city’s trade and logistics development directions more effectively going forward.

According to the 2010-2020 import-export statistics above, commodity categories with import/export value compound annual growth rate (CAGR) higher than the total trade value CAGR (imports 2.4%, exports 2.6%) are: “85 Electrical machinery and equipment and parts” (import CAGR 5.4%, export CAGR 5.6%); “90 Instruments and apparatus” (import CAGR 2.6%, export CAGR 2.7%); “33 Perfumery and cosmetics” (import CAGR 14.7%, export CAGR 16.9%); and “97 Artwork and antiques” (import CAGR 13.9%, export CAGR 17.3%).

During the same period, commodity categories with CAGR lower than the total trade value are: “39 Plastics” (import CAGR -7.2%, export CAGR -5.5%); “95 Toys and games” (import CAGR -9.6%, export CAGR -8.6%); “61 Knitted apparel” (import CAGR -8.4%, export CAGR -10.2%); and “62 Apparel, not knitted” (import CAGR -6.4%, export CAGR -10.1%).

Based on these figures, it can be deduced that most of the commodities currently imported into or exported from Hong Kong tend to be high value-added products. These commodities mainly fall under two categories. First, products that have high requirements in terms of security and transport packaging and environment (such as humidity and temperature). Examples include jewellery and artwork. Second, products with a higher value and requiring such services as temporary storage, repackaging and transhipment. Examples include electronic parts, and precision instrument parts and components.

Under "One Country, Two Systems", Hong Kong does not levy import tariffs on most commodities. As such, enterprises can freely arrange for parts to be assembled in Hong Kong before delivering them in bulk to factories in the mainland or other regions, thereby lowering cost as well as enhancing supply chain efficiency. Trade statistics in the last 10 years show that enterprises have full confidence in Hong Kong’s reliable and highly efficient logistics services, as well as the advantages offered by "One Country, Two Systems" .

Yet, for commodities which only require simple processing (such as toys and apparel), since all the production procedures are completed in the same region, finished products can be shipped directly to the target consumer market and the transport mode and route used are more direct. This, coupled with the fact that in recent years the logistics facilities in many Asian countries and territories (in particular mainland China) have greatly improved and many ports in Asia have set up regular shipping schedules and routes with various countries around the world, has lured an increasing number of enterprises to opt to export commodities directly from the place of production in order to lower transhipment costs through Hong Kong. As a result, the value of trade of these products registered in Hong Kong has been declining in the past years.

In imported and exported electromechanical products and instruments transport, air transport and land transport cargo value accounts for a larger share of total cargo value, while sea freight accounts for a smaller share (with the exception of “87 Vehicles”). The fact that land transport accounts for a relatively large share in the value of imported and exported electromechanical products and instruments indicates that quite a lot of such products are shipped to and from the southern provinces of China via Hong Kong over land.

Quite often, these products are imported into Hong Kong by air and then exported to mainland China by land. Such products also enter Hong Kong from the mainland by land and are then exported to various countries and territories around the world by air via Hong Kong. While the import and export of certain electromechanical products and instruments would also use sea transport, it is believed that their unit value tends to be rather low or their size rather large.

As mentioned above, “85 Electrical machinery and equipment and parts” is one of the categories with import-export value CAGR higher than that of total trade in a span of 10 years. In 2019, the total industrial output value of computer, communication and other electronic equipment manufacturers above designated size in Guangdong province was 2.2 times (in nominal terms) that of 2010. Its share in Guangdong’s total industrial output value also rose from 22% in 2010 to 28% in 2019⁴. To a certain extent, this shows the reason why these products account for the highest value in Hong Kong’s total and that their trade value has continued to grow.

“87 Vehicles” mainly use marine transport because vehicles and parts are mostly bulky and are not seasonal goods, hence timeliness is not the most important factor. As such, sea freight is the most cost-effective transport mode.

Luxury consumer goods import and export mainly uses air freight for two reasons. First, security considerations: using air transport not only reduces delivery time, but also indirectly lower transportation risks. Second, timeliness: since most of these luxury consumer products (e.g. perfume, cosmetics, festive jewellery etc) are seasonal, suppliers have to deliver the goods to the consumer in time. In the export value of “33 Perfumery and cosmetics”, land transport accounts for up to 49%, indicating that Hong Kong is one of the mainland’s leading distribution centres for international perfumery and cosmetics brands.

It is worth noting that river transport accounts for 23% of the export value of “33 Perfumery and cosmetics” and 21% of the export value of “22 Beverages, spirits and vinegar”. This is due to the fact that in Hong Kong’s statistical classification, goods transported to Macao by water are counted as river transport. In 2020, Hong Kong’s exports of “33 Perfumery and cosmetics” and “22 Beverages, spirits and vinegar” to Macao accounted for 23% and 24% respectively⁵ of the total export value of these products. This shows that Hong Kong is an important logistics partner with Macao in its pursuit to develop into a tourist centre.

Among general consumer products, apart from “42 Articles of leather” which mainly use air freight for import and export and “30 Pharmaceutical products” which rely on air transport for import, the import value of most of the other general consumer goods transported by land is higher, while the export value of these products transported by sea is higher. This shows that mainland manufacturing enterprises ship finished products to Hong Kong by land for export to consumer markets the world over via sea. Marine transport is normally lower cost and is therefore used for shipping commodities with a lower unit price, such as apparel, toys and shoes.

As for trade in “70 Glass and glassware”, the import and export values by land transport account for 60% and 87% of the total value respectively. This indicates that Hong Kong is a main distribution centre for mainland glass and glassware. In other words, glass and glassware from the mainland and other countries and territories converge in Hong Kong and are then transported to the mainland by land.

Among food products, it is worth noting that the difference between the import value and export value of “02 Meat” as well as “03 Seafood” is quite significant. This means that the majority of imported meat and seafood should be for local consumption.

Since some local consumers prefer the freshest possible seafood (e.g. sashimi-grade Japanese food), such products have to be delivered from the place of origin to Hong Kong within the shortest possible time and that explains why a considerable proportion of seafood is imported by air.

As for fruit and nuts export, most are transported by land (92%), indicating that currently Hong Kong is a leading logistics transit hub for the mainland’s imported fruit and nuts consumer market.

Of the above industrial supplies, “39 Plastics” and “74 Copper and articles thereof” are mainly imported by sea and exported by land. This shows that these two categories are primarily imported and transported to factories in mainland China for use as industrial raw materials. The reason these products are imported by sea is that their size is rather big and marine transport is more cost-effective.

For the import and export of “38 Miscellaneous chemical products”, the fact that both air transport and land transport account for a larger share in their total cargo value indicates that Hong Kong is a hub for the transhipment of chemical products between overseas countries and territories and mainland China. As for “27 Mineral fuels and oils”, the considerable gap between import and export values means that such products imported into Hong Kong are mainly for consumption in the local market.

3. Analysis of selected commodities

Although it was mentioned earlier that Hong Kong is gradually developing into a high value-added logistics centre in Asia, analyses based merely on commodities classified according to the Hong Kong Harmonized System (HKHS) two-digit codes would not suffice. Hence, among the 25 two-digit coded commodities listed in the tables above, commodities which have registered significant growth (over 200%) during 2010-2020, coded in eight digits, are listed in the table below.

According to the commodity categories listed above there are a number of points worth noting. First, some of the commodities are not only high in value but are also in the category of dangerous goods. For instance, as cellular phones (HS 85171200) and portable computers and data processing units (HS 84713010) contain built-in lithium batteries. They have to be handled as dangerous goods in the course of transportation in order to prevent fire hazard caused by short circuit.

Hong Kong has in place a sound air cargo inspection mechanism, and has also rolled out 100% security screening for export air cargo starting July 2021. Using X-ray machines to screen cargo can help reduce the chance of dangerous goods being loaded onto cargo aircraft without prior proper handling. Hong Kong’s extensive global air freight network, as well as its sound security screening system, are factors attracting a great number of businesses to use Hong Kong to export their goods.

Second, many of the commodities recording significant growth in export value are raw materials and semi-manufactures. Camera modules (HS 85299014), palladium (HS 71102100), and lasers (HS 90132000) are raw materials and parts required in the precision electronics industry. In recent years, the share of raw materials and semi-manufactures in Hong Kong’s re-export trade has been rising year by year, from 35.0% in 2010 to 44.1% in 2020⁶. This confirms Hong Kong’s position as a key transit hub for industrial raw materials and parts in the Asian region.

Third, many commodities need special handling. Examples include fresh durians (HS 08106000) which require cold chain logistics to preserve their freshness; cast glass and rolled glass in non-wired sheets (HS 70031900) which require shatterproof treatment; and luxury wristwatches (HS 91012100) which need heightened security. Industry players choose to transport these products via Hong Kong not only because there is strong market demand and favourable import and export system, but also probably because they believe Hong Kong’s world-class logistics facilities and competent logistics companies can provide excellent services, guaranteeing that cargo is delivered to its destinations safe and sound.

The reason for the impressive growth in the export of turbojets (HS 84111200) is that Hong Kong’s aircraft engine maintenance service has been developing steadily in recent years. In 2015, Hong Kong imported 206 turbojets and exported 234 turbojets. By 2020, the import and export of turbojets rose to 602 and 553 respectively (while the figures for 2019 are 509 and 542 respectively). Of the 602 turbojets imported into Hong Kong in 2020, 236 came from mainland China⁷.

According to the International Trade Centre Trade Map, in 2020 Hong Kong was the world’s fourth largest turbojet exporter (in terms of trade value), accounting for 14.6% of the global export value of this commodity. It is evident that Hong Kong’s development into Asia’s aviation hub not only bolsters the growth of its air transport logistics, but also its aircraft maintenance service.

Conclusion

It can be seen from the above analysis that Hong Kong’s strengths in global logistics lie in its high-end logistics services. From the angle of the dual circulation development paradigm, it can be seen that Hong Kong is an ideal place for Chinese enterprises (including Hong Kong enterprises) to export high value-added products to the rest of the world. Reasons include: Hong Kong maintains close ties with the world; it offers good storage, repackaging and transhipment services; and has a great number of international-level logistics companies and facilities which can guarantee the safe transportation of goods.

Also, Hong Kong, with its excellent logistics supporting services, can help the mainland develop high-tech industries, pursue consumption upgrade and grow the huge domestic market. While many regions in the mainland have been proactively developing the logistics industry and related facilities in recent years, Hong Kong can still leverage its advantages in systems, facilities and human resources to maintain its position as an important link in China’s supply chain connecting to the rest of the world.

In a bid to enhance its position as an international shipping, trading and aviation hub, Hong Kong can start with optimising its high-end logistics services. In the last few years, as the development of global logistics has entered a stage of transformation, the trade is not only applying technologies more extensively, but is also moving towards specialisation. Cold chain logistics, dangerous goods logistics, luxury goods logistics and pharmaceuticals logistics are now playing a more important role in the industry.

Given Hong Kong’s advantages in its geographical location and “One Country, Two Systems”, as long as it devotes more efforts to strengthening personnel training, expanding logistics facilities construction, and encouraging technology applications (e.g. automated logistics and artificial intelligence) the city is bound to complement the logistics facilities in the mainland. While proactively participating in the country’s dual circulation paradigm, actions should also be taken by Hong Kong to enhance its position as an international shipping, trading and aviation hub.

Appendix: Analysis of statistics of trade between Hong Kong and mainland provinces, municipalities and autonomous regions

In the analysis in this article, mainland China is taken as a single entity. In reality, there are 31 provinces, municipalities and autonomous regions in mainland China. Since there is no breakdown of the import/export data published by Hong Kong’s Census and Statistics Department on which provinces, municipalities or autonomous regions the goods come from, even if the goods are imported into Hong Kong by land transport, it can only be assumed that they are more likely to come from neighbouring Guangdong province.

In order to gain a better understanding of Hong Kong’s trade relations with the mainland, the following table sets out the figures of trade between Hong Kong and the various mainland provinces, municipalities and autonomous regions in 2010 and 2019. These statistics are taken from the statistical yearbooks published in 2011 and 2020 as well as from the websites of their respective Customs administrations.

Unlike the statistical methods adopted in Hong Kong, the mainland figures do not count most of the goods re-exported from Hong Kong to the mainland as imports from Hong Kong. As such, an analysis can only be made on the value of goods exported to Hong Kong from the mainland, showing the changes in merchandise exports from the various provinces, municipalities and autonomous regions to Hong Kong in 2010 and 2019. Moreover, due to various reasons, the figures for trade between some provinces, municipalities and autonomous regions and Hong Kong are not available. Hence, the trade statistics and analyses below are for reference only.

The above data reflects a number of characteristics in trade relations between Hong Kong and the mainland:

First, for many years, the value of trade between Guangdong province and Hong Kong has been far outpacing other provinces, municipalities and autonomous regions. This shows that serving the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) is Hong Kong’s most important function in dual circulation supply chains.

Second, trade ties between Hong Kong and Beijing and the Yangtze River Delta region (Zhejiang, Shanghai, Jiangsu and Anhui) are close. This indicates that Hong Kong plays a significant role in the supply chains in the co-ordinated development of the Beijing-Tianjin-Hebei region and integrated development of the Yangtze River Delta region.

Third, during the nine years from 2010 to 2019, the value of trade between Hong Kong and the provinces, municipalities and autonomous regions in the western part of China (e.g. Guangxi, Shaanxi, Chongqing, Yunnan and Guizhou) grew substantially. This strong growth is probably due to the fact that in recent years the local industries have been developing in leaps and bounds, while many enterprises there are willing to use Hong Kong’s facilities and logistics services to export goods to other countries and regions.

Hence, in order to bolster trade in goods with various provinces, municipalities and autonomous regions across the country, Hong Kong should first of all optimise its high-end logistics services in an effort to better meet the demands for industrial and consumption upgrading in the GBA, integrated development of the Yangtze River Delta region, co-ordinated development of the Beijing-Tianjin-Hebei region, and Hainan Free Trade Port.

Furthermore, Hong Kong should deepen co-operation in logistics with provinces, municipalities and autonomous regions in the southern and western parts of the mainland. In August 2019, the National Development and Reform Commission issued an overall plan (Chinese only) for the country's new western land-sea corridor, aiming to strengthen the sea-land transport network of a number of provinces, municipalities and autonomous regions in western China.

The plan helps to facilitate logistics for internal and international trade in China’s western region as well as boost the national economy and the development of the Belt and Road Initiative. It was put forward in the plan that efforts would be made to “advance cross-border transport facilitation, and strengthen connectivity with neighbouring countries [and regions] in such areas as international aviation routes”.

In this connection, Hong Kong should promote its advantages in air freight logistics to enterprises in these provinces, municipalities and autonomous regions, making the city their prime choice for conducting air cargo imports and exports. By so doing, Hong Kong can not only expand its logistics clientele, but can also play a more active role in the development of the country’s western region and Belt and Road Initiative.

¹ Source: Hong Kong International Airport

² Source: Hong Kong Maritime and Port Board

³ Source: Census and Statistics Department 2020 figures

⁴ Source: Guangdong Statistical Yearbook 2011 and Guangdong Statistical Yearbook 2020. According to the National Bureau of Statistics of China, from 2007 to 2010 “industrial enterprises above a designated size” referred to those with annual revenue from principal business of RMB5 million or more. Starting from 2011 the figure was raised to RMB20 million or more.

⁶ Source: Census and Statistics Department

⁷ Source: Census and Statistics Department

⁸ Source: Census and Statistics Department