On Currencies & Hong Kong Hating PRC Tourists

Mostly PRC tourists queue outside the flagship LV store on Canton Road.

Believe it or not, there are places where they hate tourists. These places probably believe they have (a) too many tourists already or (b) too much money to care about catering to such visitors. Now, folks who regularly go to Hong Kong are routinely amused by how the city's resident regard PRC visitors as bumpkins. Despite owing a lot of their livelihoods to the mainland--retail, finance, trade, and so forth--certain prejudices remain: Mainlanders have bad manners. Mainlanders are obnoxious. Mainlanders are unrefined. And so on and so forth.

Given such biases against mainlanders, proposed legislation aimed at limiting mainland arrivals is under consideration. In part, PRC visitors are attracted to the lower prices of luxury goods in Hong Kong since duties applied are generally lower there than in the mainland even if prices are still elevated by Asian standards. Also, Hong Kong's currency board which fixes its exchange rate (the Hong Kong dollar) relative to the US dollar has made shopping there more favorable for PRC visitors while the yuan was strengthening. Hongkongers likely believe they have too many tourists already, and they are rich enough to do without them:

Hong Kong may limit tourist arrivals as an influx of Chinese visitors stokes discontent, Chief Executive Leung Chun-ying said. The city may need measures to “slow the gains in tourist arrivals or stop increases, or cut visitors,” Leung told reporters in Hong Kong today. “We’re making studies and will seek feedback.”

Public discontent in Hong Kong has given rise to street protests as mainland tourists pour into the city, snapping up homes, designer handbags and daily necessities. Limiting arrivals in response could crimp the city’s retail sales, about a third of which were accounted for by Chinese visitors in 2013. “This may send a wrong signal to the general public in China that Hong Kong is no longer welcoming them,” Raymond Yeung, a senior economist at Australia & New Zealand Banking Group Ltd., said by phone today. “If the government decides to impose a quota on mainland visitors, the impact would be beyond the service sector.”

A Hong Kong retail group opposed the proposed curb, saying it violates the city’s free market policy and jeopardizes more than 267,000 jobs in the retail industry. “The government should expand retail space, build more infrastructure as well as extending tourist attractions,” Hong Kong Retail Management Association said in an e-mailed statement today.

Upon hearing of this I was in disbelief. Wouldn't any other city in Asia or even the world welcome more money-wielding tourists? Unfortunately it's true as plans are still afoot to reduce PRC arrivals by 20%. This despite both Hong Kong retail sales and tourist arrivals from the mainland falling in recent months:

A recent announcement by the Hong Kong government that it is considering a 20% curb on Mainland Chinese tourist arrivals has sent shockwaves through the retail community. The 9.5% year-on-year retail sales decline in April was the sharpest drop in five years, while growth rates for total Mainland Chinese visitor arrivals slowed to 14.7% year-on-year in April from 26.7% in March, according to Hong Kong government data...

Chinese visitors are said to account for as much as half of retail spending in malls like Harbour City and Times Square. The proposal to curb visitors has prompted gloomy forecasts for mall owners  and retailers. Merrill Lynch analysts estimate sales at these malls could drop 8-10% while Goldman Sachs believes this could cost Hong Kong up to HKD25 billion (USD3.2 billion) in annual retail sales.

I ultimately think commercial sense will prevail. Retail groups will probably gain more success arguing that the slump in tourism portends even worse performance if Hong Kong inexplicably applies a quota on PRC visitors. Last time I checked, the PRC absorbed Hong Kong and not the other way around. Complaints about mainlanders acting as currency arbitrageurs will likely soften. Indeed, I suspect the recent weakening of the yuan has a lot to do with Chinese visitors shopping less in Hong Kong and denting retail sales. Will the prejudices described above survive?

In most places, tourism is a welcome boost to the economy. Not in Hong Kong it seems, where a surge in mainland Chinese visitors has led simmering resentment to boil over as local protestors verbally abuse tourists.

The source of frustration is the sheer number of mainland visitors, which is expected to reach 45 million this year, and 70 million by 2017. Any city might struggle to accommodate these numbers, never mind a congested territory of 7 million. Furthermore, it’s pretty clear the majority of these visitors are not here to see Hong Kong’s undersized Disneyland but are really traders seeking bargains, courtesy of an outdated exchange-rate regime.