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Shopping Spree

Retail sales are once again booming in Hong Kong, driven in no small measure by visitors north of the border, writes DAVID O'REAR

The retail sector has come back with a bang this year, following 2003's bout with SARS.  Sales in the first five months of the year expanded 13.2 percent, with tourist-related purchases such as jewellery and expensive watches leading the way. However, comparing 2004 to the atypical 2003 is misleading, as even a poor showing would register positive growth a year after the masks came off.

We've seen this sort of thing before. In the aftermath of the Asian financial crisis, comparisons with the previous year were meaningless, and so we looked for something more 'normal' as a base. In the case of Hong Kong's nominal GDP, this year is likely to still be below the 1997 high of HK$1.36 trillion, unless nominal growth tops 10.5 percent. Another example is trade: ASEAN's imports last year finally topped their 1996 level, seven years earlier.

In cases where the previous base is inappropriate, it can be useful to look back not one year but two years, or even more. Based on the change since 2002, the HKSAR's retail sales this year are up a respectable 5.5 percent. That's the best sustained performance since early 2000, and a clear signal that the recovery is solidly under way.

The upsurge in spending also portends an end to deflation. As the first chart shows, movements in retail sales preceded price movements. The crash in 1998-99 predated deflation by about a year, and as sales recovered, deflation eased. The downward shocks in 2002 and 2003 again pushed down prices. On the strength of strong recovery this year, it isn't hard to predict a return to positive inflation this summer.

Retail sales are also a good proxy for private consumption expenditure (PCE), even though the former does not include the huge services component that dominates PCE. Over the past decade (as illustrated in the second chart), sales and PCE have moved in the same direction, albeit occasionally at a different pace. If the April-May figures hold for the month of June, second quarter real PCE could grow better than 10 percent for the first time in more than a decade.

Tourism is also on the rise. Visitor arrivals are up nearly 40 percent this year from the low SARS-affected base, but also an impressive 33.7 percent over early 2002. As we've come to expect, visitors from north of the boundary are providing the key impetus, up 56 percent over 12 months and a stunning 99.7 percent over two years. The third chart shows the correlation between Mainland visitor arrivals and retail sales.

The average stay in a hotel cost HK$658 a night in January-April this year, 13.2 percent more than a year earlier. Occupancy is also up strongly, from 66 percent to 85 percent. The year-to-date figures do not fully reflect the effects of SARS, and so May and June data should show very strong growth.

Mainlanders remain our most profitable market segment, spending an average of HK$6,018 per head last year, as compared to the overall HK$5,502. Moreover, mainlanders tend to stay longer, and spend freely for an average of 4.8 days, versus 4.1 days overall.

However, holidaymakers from further afield have yet to return. Mainlanders aside, arrivals were up 21.4 percent from 2003, but down 7.5 percent from 2002. The major decline is among those coming from Japan (down 31.4 percent over two years) and Taiwan (off 16.4 percent, again from the 2002 base).

Under a revised methodology, the Hong Kong Tourism Board now estimates tourism earned Hong Kong nearly HK$75 billion last year, down 3.2 percent from 2002 but up 21.3 percent from two years earlier. It is particularly interesting to note that spending by overnight visitors largely held steady (up 1.9 percent over 2002) whereas the day-trippers cut their contribution by just under 19 percent despite spending 24 percent more per person.

Our services to compatriots from beyond the boundary will be the major influence on Hong Kong tourism for quite some time to come. The July 1 extension of simplified visa procedures to additional cities in Jiangsu, Zhejiang and Fujian opens up a whole new market for the second half of the year, and there is every indication that further liberalisation will add additional tens of millions of people to the population considering a vacation in the HKSAR. By 2005 or 2006, tourism is likely to be a HK$100 billion business.

David O'Rear is the Chamber's Chief Economist. He can be reached at david@chamber.org.hk