Rapaport Magazine

Hong Kong Market Report

Slowing Economy Dampens Sales

By Liana Cafolla
The Mid-Autumn Festival holiday at the end of September was followed this year by the National Day holiday on October 1, resulting in an extra-long eight-day break — known as Golden Week in China — that ended on October 7. Traditionally, Golden Weeks are a boon for retailers in Hong Kong because Mainland Chinese visitors flood the city to celebrate the holiday and indulge in weeklong shopping sprees for duty-free merchandise. 

“A longer holiday means tourists are likely to stay longer and shop more in Hong Kong,” said Peter Suen, executive director of high-end jewelry retailer Chow Tai Fook for Hong Kong and Macau, speaking before the holiday.

In 2012, however, expectations of high spending by Mainland visitors were undermined by China’s weakening economy. Hong Kong’s retail sales growth hit a seven-year low in the first seven months of 2012. Retail sales in July grew by just 3.8 percent compared with July 2011, and lower spending by Mainland visitors was cited as the main reason.

“Don’t place high hopes on big growth in retail sales,” Caroline Mak, chairwoman of the Hong Kong Retail Management Association (HKRMA), told the South China Morning Post on October 1. “I think the market in October will be just so-so.”

And so it proved. Disappointing sales over the holiday hit jewelry retailers particularly hard, with the fallout evident in their share losses posted on October 8, the day after the holiday ended. Shares in five major jewelry companies were among the top ten biggest losers on the stock exchange that day.

Shares in Luk Fook Holdings International saw the biggest fall — 7.89 percent. The next biggest loser was Chow Tai Fook Jewelry Group, which was down by 6.35 percent. Chow Sang Sang Holdings International fell 4.8 percent. Luxury watch retailers Hengdali Holdings lost 5.45 percent, while Emperor Watch and Jewelry was down 5 percent.

“Jewelry and watch sellers targeted at Mainland consumers reported single- or double-digit drops year on year,” said a spokesperson for the HKRMA, reporting after the holiday. The numbers were even more of a disappointment because they came amid high expectations. “The expectation in these sectors had been for a lower-end, double-digit increase,” said the spokesperson.

Changed Spending Habits
Although more Mainland visitors came to the city during this year’s Golden Week compared to Golden Week in October 2011 — 960,000 in 2012 versus 770,000 in 2011, according to the Hong Kong Tourism Board (HKTB) — their patterns of spending have changed. “They are no longer buying expensive watches and jewelry,” said HKTB Chairman James Tien. “Instead, they are spending more on affordable items. It might still be a watch, but it will be a less expensive one.”

Dealers agreed that sales volume has fallen on lower spending from Chinese visitors. “Business in October was very quiet. It’s even worse than September,” said Raymond Ng, director of Yokee Hong Diamonds, a Hong Kong–based dealer. “China’s economy is slow and the impact is quite significant on the diamond industry.”

Anti-Chinese Sentiment
There has also been a growing backlash in the sentiment of Hong Kong residents against the ballooning numbers of visitors coming to the city from the Mainland. The negative sentiment is so strong that it could end in negotiations with Beijing to try to curb total visitor numbers. At present, it is the Mainland that decides how many of its nationals can visit Hong Kong. In 2011, 28 million Mainlanders visited Hong Kong, four times the city’s population, putting pressure on transportation and tourist sites.

Cash-rich Mainland visitors also are blamed for driving up the city’s already-sky-high property prices and for crowding maternity hospitals, leaving no room for Hong Kong mothers. Babies born in Hong Kong to Mainland mothers receive residency rights in Hong Kong, a policy that has resulted in thousands of pregnant Mainland women coming to the city to give birth. Hong Kong’s chief executive has pledged to put an end to the policy in January 2013.

Territorial Dispute Backlash
Further afield, China’s war of words with Japan over the ownership of the tiny groups of islands known as the Diaoyus by China and the Senkakus by Japan has continued to escalate, and has begun to take an increasingly heavy economic toll on both countries. Following a wave of damage to Japanese businesses and products and even Japanese nationals by marauding gangs of angry Chinese, the Mainland and Japan have begun to attempt to resolve their differences through high-level diplomacy.

In the meantime, however, much damage has been done. Nissan and Toyota said they would cut production in China following attacks on their factories there. Airlines in both nations have reduced flights to each other’s territories, and many Japanese tourists and business travelers have cancelled planned visits to China — and to Hong Kong— for fear of reprisals.

Article from the Rapaport Magazine - November 2012. To subscribe click here.

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