Economic Update


Retail Market Looking Up, Despite Lingering Uncertainties

Hong Kong’s retail sector finally has something to cheer about after facing years of steady declining sales. Moderate growth in the inbound tourism sector in the past few months has also caused retail sales to pick up as well (see Chart 1). However, lingering uncertainties include the U.S. Federal Reserve’s (Fed) potential moves to reduce its balance sheet later this month, which could cause the USD – and hence HKD – to strengthen, which might make Hong Kong less attractive to tourists. Such uncertainties would consequently impact the retail market.

Visitor arrivals on the rise

Visitor arrivals increased 1.2% in the three months up to July and 2.4% YoY during the first seven months of the year. In our view, the modest increase after a steady decline is possibly a result of the negativity of the changes made to the Individual Visit Endorsements for permanent residents of Shenzhen wearing off, which had been weighing down the retail business since it came into effect in April 2015 (see here).

Stronger inbound tourism numbers is also in part due to the shifting travelling patterns of Mainland visitors. According to China National Tourism Administration, outbound Chinese tourists reached 62 million in the first half of 2017, representing a year-on-year increase of 5.1%. Given lingering tensions between the Mainland and a few popular tourist destinations, mainly Korea and Taiwan, the number of Mainland tourists visiting those destinations declined dramatically (see Chart 2).[1] This has helped Hong Kong re-establish itself as a favourite destination for Mainland visitors.

These trends have paved ways for Hong Kong – which received an estimated 46% of total outbound tourists from Mainland China in 2016 – to benefit from more incoming visitors. Given the existing geopolitical tensions and a favourable comparable base in the second half, incoming visitor growth could accelerate in the near term.

Risks remain

In spite of the cautiously optimistic outlook for inbound tourism, some risks remain for retailers and other tourism related industries. For instance, despite achieving a higher average occupancy rate (from 83.7% in 1H2016 to 87.3% in 1H2017), the simple average achieved hotel room rate in the first half had dropped 2.3% YoY for the accommodation sector. Therefore, it remains to be seen whether tourism related sectors have already bottomed out.

Another key risk is the potential impact of the uncertainty associated with the tapering of the U.S. Federal Reserve (Fed). While the actual impact of the Fed’s decision to taper its balance sheet remains uncertain (see here), the FOMC declared that it would “begin implementing a balance sheet normalization programme this year” in the post-meeting communiqué.[2] Although Fed Chair Yellen previously said that it would involve slowly reducing the reinvestment of principal payments received from the securities in its portfolio,[3] any decision or rhetoric by the Fed to accelerate efforts to shrink the balance sheet could agitate financial markets. Noting that the performance of the Hang Seng Index is highly correlated with Hong Kong’s GDP and consumption growth patterns,[4] any turbulence would drag the improving GDP and consumption growth down (see Chart 3).

The next rate hike by the U.S. Fed is not expected to come before December, if not in 2018. However, with the strong job market in the U.S., the Fed could adopt a more hawkish plan. If this happens, it would lead to strengths of USD and HKD, which will also hurt the price competitiveness of Hong Kong’s inbound tourism.

In short, the retail sector has seen a steady ringing of its cash registers, and risks associated with the sector appear to be in check. From a numerical perspective, the positives outweigh the negatives for the near future.

[1] In the first seven months of 2017, the numbers of visitors visiting Taiwan and Korea have declined by 37.7% and 46.5% YoY respectively.

[2] Transcript of Chair Yellen’s Press Conference (14 June 2017)

[3] The Fed has set an initial cap for the reduction of reinvestment at US$10 billion (i.e. a $6 billion initial cap was set for Treasury securities, a $4 billion initial cap for mortgage-backed securities). The limit will steadily increase by US$10 billion every quarter and eventually reach US$50 billion (i.e. a $30 billion initial cap was set for Treasury securities, a $20 billion initial cap for mortgage-backed securities) per month in a year’s time.

[4] Over the past 20 years, the correlation coefficients between quarterly HSI performance and GDP/Household Consumption growth – with the former leading the latter by one quarter – were 0.79 and 0.69 respectively.


Over the years, we have helped businesses overcome adversity and thrive locally, in Mainland China and internationally.

If you want to take advantage of our network,insights and services, contact us today.