The US-China trade war is likely to stoke US consumer price inflation and force more production to be moved from China to its Asian neighbours, especially in the textile industry, though there will not be a big reduction in manufacturing in China, according to supply chain management giant Li & Fung.
While some “rebalancing” of global merchandise trade is possible in the wake of the tit-for-tat tariffs applied by the US and China to each other’s goods, drastic capacity reduction in Chinese factories is unlikely given fast domestic demand growth and some shifting of sales to Europe, chief executive Spencer Fung told reporters at an earnings briefing on Wednesday
“There have been a lot of knee-jerk reactions from some manufacturers desperate to move sourcing out of China, but there is not a lot of spare capacity in alternative production centres,” Fung said. “For apparel, there are more options than hard consumer goods.”
He said that the trade war so far had had a minimal impact on the operations of Li & Fung, the flagship listed unit of the 112-year-old trading conglomerate Fung Group, whose growth has epitomised Hong Kong’s role as a trading hub. The products on which US tariffs have been imposed or which are under consideration for levies so far only make up less than 2 per cent of its sales.
Also most labour-intensive products that are traded by the company, which sources merchandise from 52 nations, have so far not been affected.
China accounted for 49 per cent of Li & Fung’s procurement in the first half, down from 54 per cent in 2016, while the US accounted for 79 per cent of its merchandise sourcing business turnover.
The company’s net loss for the first six months amounted to US$85 million, compared to a profit of US$101 million in the same period last year, as it booked US$135 million of losses on the sale of its furniture, jumpers and beauty businesses.
Revenue – excluding the impact of the sale, completed two months ago – slid 9.6 per cent year on year to US$5.85 billion. First-half operating profit declined 18 per cent to US$124 million.
The loss was due to retail customers’ strategy of cutting the amount of inventory they carried so they could react faster to changing consumer preferences and price deflation of consumer goods, as well as deal with some physical store closures amid growing online purchases, Li & Fung said.
Chairman William Fung Kwok-lun said that if a 25 per cent tariff was imposed on a large number of China-made consumer goods, some consumer price inflation pressure would be probable due to capacity constraints elsewhere in Asia, forcing US consumers, retailers and their suppliers to absorb some of the cost burden.
Spencer Fung said the company is still aiming for low double digit percentage turnover growth in 2019 compared to 2016, despite the decline seen so far this year.
He also announced that the company would list and sell new shares in its logistics business, whose first-half core operating profit grew 15.1 per cent year on year to US$38 million, by the middle of next year. Mainland China accounted for 57 per cent of the logistics business’ first-half revenue of US$543 million.
Li & Fung shares closed 0.3 per cent higher on Wednesday at HK$2.97, ahead of the results.
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