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Brexit sends chills through Hong Kong's retail sector

A rising number of empty shop spaces in Causeway Bay, a prime shopping district in Hong Kong (Photo by Jennifer Lo)

HONG KONG -- Brexit could have come at a bad time for Hong Kong's high street as retailers in the territory are already grappling with slumping sales due to a slowing economy in China.

The territory's retail sales slid for the 15th straight month in May, plunging 8.4% on the year to 35.7 billion Hong Kong dollars ($4.6 billion). The decline was steeper than a 7.5% fall in April, official statistics showed on Thursday.

The brief spending spree during China's Labor Day "Golden Week" holidays was far from enough to reverse the fortunes of the territory. In May, the fall in tourist arrivals widened to 6.4% on the year, from 2% in April. Mainland Chinese visitors, who account for almost 80% of the total, fell 8%.

A government spokesperson said near-term retail sales would still be subject to "a large degree of uncertainty," dragged down by external events and market volatility.

Gone are also the wealthy spenders. Sales of jewelry and watches -- typically popular among mainland visitors -- fell 18.7% in May from a year ago. Leading the decline was sales of durable goods like smartphones and computers, which slumped almost 35% year-on-year in May. Food, alcoholic drinks and cosmetics remain few of the positive areas, although their growth rates cooled off in the month due to subdued local spending power.

Calling the May statistics "a shock," Chairman of Hong Kong Retail Management Association Thomson Cheng said next month's retail sales could be worse with a near double-digit contraction. He expects the weakening of currencies like the pound and euro after Brexit -- which refers to the British vote to leave the European Union on June 23 -- would prompt more Hong Kong residents to shop abroad, further hurting local consumption.

"Retailers should now accept the reality that a quick rebound would be unlikely for the industry," said Cheng, adding that the next 18 months would be a "period of correction" with more companies downsizing and some businesses closing. He stressed that there should be no large-scale layoffs, however.  

The worst-than-expected retail data paint a gloomy picture of Hong Kong's wider economy. The former British colony is already girding itself against China's economic slowdown and a weaker yuan that curbs spending power. Now there is the third headwind -- Brexit's contagion effect on the small, open economy.

In the first quarter this year, Hong Kong's economy grew 0.8%, the slowest pace since 2012. Pessimists warn that the U.K.'s historic and unexpected vote to leave the EU will push Hong Kong into a recession.

Two investment banks slashed their growth forecast for the territory, citing Brexit effects. Bank of America Merrill Lynch lowered it by 20 basis point to 1% this year. Nomura cut it by a full percentage point to -0.2% for the year. The bank's Asia Chief Economist Rob Subbaraman said on Tuesday Hong Kong was among the most vulnerable economies in the region, alongside Singapore, citing its "high exposure to U.K. banks" and "managed exchange rate."

Should Brexit continue to keep the U.S. dollar strong, the Hong Kong dollar's peg to the greenback would have "a negative impact on Hong Kong tourism and retail sales, especially if it means a weaker yuan," Subbaraman wrote.

Others are less convinced about a Brexit-driven recession. "I don't see any direct impact that will be significant enough to derail Hong Kong's economy, which is already doing quite badly," said Chris Leung, a senior economist at DBS Bank in Hong Kong. The spillover effect, he said, would largely be felt in Hong Kong's financial markets.

Bank of China's subsidiary BOC Hong Kong expects "slow-speed growth" for the territory as contraction in retail sales and tourist figures eased somewhat from previous months. "There are reasons to be cautiously optimistic about Hong Kong," said the bank's Chief Economist E Zhihuan.

As Brexit is likely to prompt the U.S. Federal Reserve to defer, yet again, interest rate hikes, the pressure on the demand and, subsequently, prices of Hong Kong properties would be somewhat alleviated. BOC Hong Kong predicts a nearly 6% fall in property prices in the next six months, which would mark a total of a 10% price correction for the year.

But for some, the China factor will ultimately play a bigger role on Hong Kong than any other factor, even Brexit.

"People are actually investing in Hong Kong because of China," said Jahangir Aziz, JP Morgan's chief economist for emerging markets. "You have to see changes in financials between China and the U.K. for Hong Kong to be affected by the capital flows and we don't see that happening."

Nikkei deputy editor Kenji Kawase and staff writer Zia Zheng in Hong Kong contributed to this story. 

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