HK tourism/retail – hostage to the strong peg

 Recent statistics on visitor arrivals in HK have been positive, with all months year-to-date reporting higher numbers compared to 2023 (brown line below): 

Chart 1: some good bounce from Covid lows, but visitor arrivals still well down from 2019 levels

However, we are still quite a large gap down from pre-lockdown arrival levels (ie in 2019). Even though comparables will become easier later this year, due to the adverse effect of social unrest in Hong Kong in H2 of 2019 (purple line) on visitation.

If we take H2 2018 as ‘normal’ market for H2 (see black line), then the gap from here remains very large indeed.

PRC recovering faster, but much room to make up for

With Chinese visitors now making up the bulk of total arrivals, their resumed enthusiasm for HK as a destination is certaintly encouraging, but even a return to the down trend top requires some 60% further increase from current levels, let alone recapturing the peak reached in 2018: 

Chart 2:both overseas and PRC visitors need big jumps to return to pre-lockdown levels

What is more challenging for HK still is how the spending pattern has also moved against tourism income for the city – despite high inflation over the past few years, the average spend per tourist has gone down, no up – the per capita spend is now at $4,154, down 18% from the 2013 highs:

Chart 3:both total spend and per capita spend by tourists are lower vs the hay days of 2013-14

Part of this trend is driven by a combination of increased availability of luxury goods in the mainland as more brands open shops in major cities, as well as more strict enforcement of cross border parallel imports by the PRC Customs. Of course, the poor economy up north, together with a property market that has contracted for several years do not bode well for generous spending either.

Strong USD to remain strong headwinds for tourism revenues

In the near term, the stronger US economy versus the rest of the world means US interest rates will likely stay high, whereas rate cuts have become the norm in emerging economies, especially China. This may drive further weak currencies against the USD, making goods in Hong Kong even more expensive for visitors:

Chart 4: higher USD usually means lower visitor arrivals

As can be seen from the chart above, stronger USD results in fewer tourist arrivals. Another factor that may help the USD stay strong is the continued geopolitical conflicts in both Europe and the Middle East, resulting in more capital flight into the dollar.

Strong USD continues to drag on HK retail rents

Currencies do not only affect arrivals, they also impact resident departures – it is now almost taken for granted that the locals frequent their favourite shopping malls or entertainment venues in Shenzhen during weekends. In the meantime, the price adjustment that HK businesses have to go through must take the form of income reduction rather than through currency depreciation thanks to the peg between HKD and USD. As a result, retail rent may continue to face pressure as long as USD strength continues and visitors as a result continue to stay away:

Chart 5: lower visitor arrivals => lower retail rent

This set of conditions echoes our call that HKD should adopt a Singapore style managed float rather than a very inflexible fixed peg, which while provides more visibility and certainty, can do more damage to the economy when the American monetary policy is progressing in an opposite trajectory to the economic realities that we face here at home.

 

 

 

The author would like to thank Janice Chu, currently studying for a BSc in Computational Finance and Financial Technology at The City University of Hong Kong for assisting in the data collection and analysis in the writing of this article.