Hong Kong Economics Flash:Consumption Deterioration Continues in March

Retail sales remained weak: Mar retail sales fell by -8.8%yoy and -9.8%yoy, byvolume and value, respectively. The declines were slightly better than our forecasts,and Mar appeared to have improved vs. the Jan-Feb averages of -12.4%yoy (value)and -13.6%yoy (volume). To put the data into historic perspective, the seasonaladjusted retail sales data is as poor as the days of the Financial Tsunami (Figure 2).

    We see retail sales in the near term will remain dragged by changing touristshopping patterns and fragile local consumption sentiment.

    Breakdown by product types: Tourist-preferred items like luxury goods(watches/jewellery) continued to plunge by -20.4%yoy in value terms in Mar, butmedicines & cosmetics saw a small increase of 1.5%yoy. Regarding local demand,we saw durable goods sales posted a 22.6%yy decline and car sales fell by 8% inMar. Tech gadgets also saw marked declines with misc. consumer durable goodssales (e.g. smartphones) fell by -38.2%yoy in Mar and electrical goods andphotographic equipment fell -20%yoy.

    Tourism patterns in March: Total tourist arrivals fell -4.3%yoy in Mar (vs. Jan-Feb’s -13.6%), of which Mainland Chinese tourists declined by -6.9%yoy (vs. Jan-Feb’s -18%) and tourists from non-China origin rose 2.8%yoy (vs. Jan-Feb’s +7%).

    It appears that tourist arrivals have recouped somewhat after the outsized drop inFeb (which may have been exaggerated by the Feb 8 Mongkok incident). It is alsointeresting to note that tourists from China saw the tenth month of YoY decline,while non-Mainland China tourists have registered six months of YoY growth.

    Mixed trends during the Labor long-weekend holiday in May: According to statsreleased by the Immigration Department, tourist arrivals from Mainland China rose7% during the Golden Holiday (30 Apr-1 May) as compared to last year’s Goldenholiday stretch. Meanwhile total tourist arrivals rose only 0.2% during the period.

    There was also a noted shift towards Mainland tourists travelling to HK on theIndividual Visit Scheme, while the number of group tours from China dropped by40% to 170 tours only. We will need to closely monitor the shifting dynamics oftourism, factoring in: rising competition (e.g. Shanghai Disneyland will open in mid-June), FX-adjusted purchasing power (recent Asian FX strengthening is a mild, butlikely temporary, plus), equity wealth effects from A-shares, the rising trend for non-China tourists to use HK as a transit stop to visit other Chinese cities.

    Consumption likely to weaken further with the economic slowdown: Despiteabove-mentioned smaller than expected declines, we think the weak consumptiontrend is well established, which will have lagging effects on hiring and shop rentals.

    Restaurants receipts saw smaller growth each month in 1Q (Jan: 4.6%yoy, Feb:1.3%yoy and Mar: 0.3%yoy). Anecdotal evidence also indicated rising restaurantsclosures and delayed salary payments to staff for the F&B industries.