In both April and May Hong Kong International Airport registered a decline in total cargo freight. Compared with last year, the decline was 6.5 percent and 9.9 percent respectively. After the strong growth of 2010, which was primarily a recovery from the slump of 2009 - the worst year of the Great Recession as it was dubbed in the financial circles of advanced countries - the unexpected declines of the two months might imply the recovery is over. This may be the case even though it has not yet recovered fully the lost ground of 2009.

What are the reasons behind the declines? As the recovery has been weak, one may argue that the Great Recession is not yet over in the US, EU and Japan. The quantitative easing monetary policies of the central banks of those advanced countries have succeeded in stopping the recession from worsening.

But they are not the right remedy to restore economic dynamism to the world economy and in particular the advanced countries. Most of the newly issued monies have either been lost in the re-inflated financial markets or flowed to the emergent markets. In both cases they are more for the purposes of speculation rather than for financing the structural adjustments in the real economy that are essential for restoring economic health to the advanced countries.

The structural imbalance of the world economy continues simply because there have not been any significant adjustments in the overstretched US and some of the formerly bubble economies in Europe with the UK in particular leading the Mediterranean group of nations in this regards.

If the demand of the advanced countries begins to weaken, the exporting economies of the world would definitely suffer. The world's largest exporter, China, would also suffer, despite its above average export competitiveness. In recent months there has been widespread news about closures of local exporting firms in the Yangtze River Delta region and the Pearl River Delta (PRD) region, the two export growth engines of China.

In Dongguan in Guangdong province, for example, the local government confirms that there are closures but they are not as widespread as in 2008 and 2009.

In general, however, firms have faced a double squeeze of cost inflation and yuan appreciation that lowers export revenues denominated mainly in US dollars. There are also pessimistic expectations in corporate circles that the situation will only become worse in the latter half of the year. The hardest hit will probably be smaller Hong Kong-invested firms, some of which have not yet recovered from the financial tsunami. With exporting firms suffering from the double squeeze and reluctant to accept new orders, the demand for logistics and transportation will be reduced.

On the other hand, the shift from exports to domestic sales has progressed quite smoothly in Dongguan and Shenzhen, but mainly for larger firms. Foxconn, the largest EMS (electronics manufacturing service) in the world and the largest exporter in terms of volume in the PRD region, has adopted a diversification strategy to spread its local assemblies to several cities on the Chinese mainland. The immediate outcome is a decrease in the demand for air cargo freight as electronics parts and finished products are often shipped by air.

Within the region, the Guangzhou airport has concentrated mainly in the airlifting of seafood and speed post services, which are taking up 80 percent of the total cargo shipped through the airport. Industrial cargo has been handled by the Hong Kong International Airport.

The diversification of firms such as Foxconn and the consequent drop in air cargo have taken place therefore mainly at the Hong Kong International Airport, and it probably explains the monthly declines in cargo turnover in April and May this year. If this truly is the case and the decline is structural instead of seasonal, one should expect further declines in air cargo shipments in the coming months and perhaps even years.

It may become a long-term declining trend if the metropolitanization process in the PRD region turns it into a service economy instead, thereby forcing most of the manufacturing activities to shift to places further away from the core areas of Guangzhou and Hong Kong. Thus Hong Kong's airport will lose the local industry's demand for air cargo freight from the region forever.

The policy implication is far reaching. If there is a structural decline or growth in air cargo shipments at Hong Kong International Airport slows down, then there will be lesser grounds for the building of the third runway. This is particularly so when the construction of the third runway will not be completed for another 12 years . The long gestation and construction time has already introduced many uncertainties to demand growth projections for the airport. With the structural change in the industrial economy in the PRD region, the region's demand will not be able to accommodate a third runway in Hong Kong when Guangzhou may already have built its next two runways (the fourth and fifth ones) and Shenzhen the third runway within the next 12 years.

Hong Kong has to find new sources of demand to sustain its current operations and the new runway beyond the next 12 years. Even so, the competition will be very acute because of the large increase in capacity in the regional cluster of airports. Thus late expansion of the airport in Hong Kong is running counter to any conventional wisdom.

The author is head of China Business Centre, Hong Kong Polytechnic University.

(HK Edition 06/24/2011 page3)