Hong Kong rides out the yuan storm with lost tourism and re­tail


On Aug. 11, the Peo­ple’s Bank of China set the trad­ing range of the yuan about 1.9 per­cent lower against the U.S. dol­lar, al­low­ing the cur­rency to float at a more mar­ket-driven level against the green­back. In the week ended Aug. 15, the yuan de­pre­ci­ated by nearly 4 per­cent.

A fall­ing yuan ex­change rate means de­clin­ing pur­chas­ing power of the cur­rency. While a cheaper yuan may help ex­porters, it ex­erts neg­a­tive spillover ef­fects on the Hong Kong tourism and re­tail sec­tors, be­cause these two seg­ments are heav­ily de­pen­dent on main­land tourist spend­ing.

Hong Kong’s to­tal visi­tor ar­rivals from the main­land plum­meted 8.4 per­cent to 49.2 mil­lion in July com­pared to last year, reg­is­ter­ing the largest sin­gle-month de­cline in six years, gov­ern­ment data showed.

The slump was at­trib­uted to the 10-per­cent fall in main­land visi­tor ar­rivals and 3-per­cent drop in over­seas visi­tor ar­rivals in July. That came af­ter to­tal tourist ar­rivals had al­ready fallen by 2.9 per­cent on-year in June.

Be­tween Aug. 1 and Aug. 15, to­tal visi­tor ar­rivals de­clined another 2.1 per­cent, gov­ern­ment data re­vealed. “Be­cause of the (U.S.-dol­lar) Linked Ex­change Rate Sys­tem (LERS), Hong Kong is no longer a cheap tourist des­ti­na­tion, so that of­fer­ing price dis­counts may not be an ef­fec­tive move to draw visi­tors,” said Michael Wu Si­uy­ing, chair­man of the Travel In­dus­try Coun­cil of Hong Kong.

The Hong Kong dol­lar was pegged to the U.S. dol­lar in 1983, amid fi­nan­cial mar­ket wor­ries about Hong Kong’s fu­ture ahead of the han­dover.

Un­der the LERS, the ex­change rate move­ments of the Hong Kong dol­lar against other cur­ren­cies de­pend en­tirely on the strength or weak­ness of the U.S. dol­lar.

Re­cent eco­nomic data show that the U.S. econ­omy and jobs sit­u­a­tion are grad­u­ally pick­ing up, fu­el­ing mar­ket ex­pec­ta­tion that the U.S. Fed­eral Re­serve may raise in­ter­est rates as early as Septem­ber. Ex­pec­ta­tions of a U.S. in­ter­est rate hike cou­pled with the ren­minbi de­pre­ci­a­tion have sparked a green­back rally against ma­jor cur­ren­cies, with the U.S. dol­lar in­dex touch­ing the high­est level in nearly four months in mid-Au­gust.

With the Hong Kong dol­lar pegged to the U.S. dol­lar, a ris­ing green­back trans­lates into a more ex­pen­sive Hong Kong dol­lar com­pared with other global cur­ren­cies, which hurts the city’s tourism and re­tail sec­tors.

“The de­pre­ci­a­tion of the Ja­panese yen is prompt­ing many main­land and over­seas tourists to visit Ja­pan,” Wu noted. “Be­sides the cur­rency rate fac­tor, the re­lax­ation of visa re­quire­ments for main­land tourists by many gov­ern­ments has also en­cour­aged more of them to travel over­seas rather than visit Hong Kong.”

Wu be­lieves that the Hong Kong tourism in­dus­try will en­ter a pe­riod of slug­gish­ness and urged in­dus­try prac­ti­tion­ers to di­ver­sify sources of visi­tor ar­rivals by re­duc­ing re­liance on main­land visi­tors and at­tract­ing more tourists from South Korea and South­east Asian coun­tries.

Hong Kong re­tail sales have dropped in re­cent months as main­land visi­tors cut spend­ing in the city. Ac­cord­ing to the Cen­sus and Sta­tis­tics Depart­ment, to­tal re­tail sales in the first half dropped 1.6 per­cent on-year, with the value of sales of jew­elry, watches and clocks, and valu­able gifts sink­ing by 15.9 per­cent in the same pe­riod.

“Yuan de­pre­ci­a­tion may have a neg­a­tive im­pact on the lo­cal re­tail, tourism and cater­ing sec­tors,” Gov­ern­ment Economist He­len Chan Lee Hoi-lun cau­tioned at press con­fer­ence on Aug. 14 to dis­cuss data on the city’s sec­ond quar­ter eco­nomic growth.

“The down­ward trend in in­bound tourism is more en­trenched that may poise to be one source of un­cer­tain­ties to Hong Kong eco­nomic growth in the re­main­ing months of this year. The per­for­mance of the Hong Kong econ­omy in the sec­ond half of this year may not be bet­ter than the first half,” Chan added.

A ris­ing Hong Kong dol­lar not only hurts the lo­cal re­tail and tourism sec­tor, it also hurts the ex­port seg­ment be­cause an ex­pen­sive Hong Kong dol­lar and a weaker-than-ex­pected global eco­nomic re­cov­ery would crimp over­seas de­mand.

“Hong Kong’s trade will likely have con­tracted fur­ther given the weak re­gional trade data in July. In par­tic­u­lar, the main­land trade slump in July in­di­cates that Hong Kong’s re-ex­ports will suf­fer,” said Liu Li-gang, Greater China chief economist at Aus­tralia and New Zealand Bank­ing Corp.

Hong Kong’s to­tal ex­port val­ues (com­pris­ing re-ex­ports and do­mes­tic ex­ports) in July de­creased 1.6 per­cent year-on-year to HK$320.9 bil­lion af­ter an an­nual de­crease of 3.1 per­cent in June.

For the first seven months of 2015, the value of to­tal goods ex­ports dropped 0.2 per­cent com­pared with the same pe­riod in 2014.

Within this to­tal, the value of re­ex­ports re­mained vir­tu­ally un­changed while the value of do­mes­tic ex­ports plunged by 14 per­cent.

It is also feared that the stock mar­ket volatil­ity trig­gered by the re­cent yuan de­pre­ci­a­tion may gen­er­ate neg­a­tive wealth ef­fects to slash do­mes­tic con­sump­tion.

Wealth ef­fect refers to the ten­dency for peo­ple to spend more when their fi­nan­cial as­set val­ues in­crease.

“Global stock mar­ket routs, un­leashed by a fal­ter­ing main­land econ­omy, cur­rency de­pre­ci­a­tion on the main­land and in emerg­ing mar­kets, and a pos­si­ble U.S. in­ter­est rate hike as early as Septem­ber, will cer­tainly af­fect the Hong Kong eq­uity and prop­erty mar­kets,” Pa­trick Shum Hing-hung, in­vest­ment man­ager at Ten­gard Fund Man­age­ment, told China Daily.

“The Hong Kong share mar­ket has started to slump now and the city’s prop­erty prices will prob­a­bly not rise fur­ther this year. If this trend con­tin­ues, it will cre­ate neg­a­tive wealth ef­fect on house­hold con­sump­tion, which will even­tu­ally drag down the city’s gross do­mes­tic prod­uct level,” Shum said.

But other an­a­lysts are of the view that any neg­a­tive con­se­quences of ren­minbi de­pre­ci­a­tion should not be over-em­pha­sized, and it may in fact be ben­e­fi­cial.

“Ren­minbi de­pre­ci­a­tion may help sta­bi­lize Hong Kong ex­ports be­cause re-ex­ports con­sti­tute 98.6 per­cent of the city’s to­tal ex­port value. A de­clin­ing ren­minbi means that lo­cal re­ex­porters can source their prod­ucts cheaper,” Gov­ern­ment Economist Chan noted.

“The re­cent yuan de­pre­ci­a­tion is a one-off mea­sure by the cen­tral gov­ern­ment to pro­pel fur­ther yuan in­ter­na­tion­al­iza­tion. When the yuan ex­change rate be­comes more flex­i­ble, it can play a greater role in ad­just­ing the main­land econ­omy. When the main­land econ­omy be­come more flex­i­ble, re­silient and sus­tain­able, it will be good for Hong Kong,” Chan ex­plained.

Ter­ence Chong Tai-le­ung, as­so­ciate pro­fes­sor of Eco­nom­ics at Chi­nese Univer­sity of Hong Kong, is also of the same opin­ion.

“More ren­minbi ex­change-rate volatil­ity could make its cur­rency ex­change rates more flex­i­ble, fur­ther push­ing for­ward yuan in­ter­na­tion­al­iza­tion and fi­nan­cial re­forms. This can fur­ther ce­ment Hong Kong’s sta­tus as an off­shore yuan fi­nanc­ing cen­ter.”

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