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Hong Kong retailers boosted by the rocky Beijing-Seoul relationship

Mainland tourists are flocking to the territory and shunning South Korea

Flagship stores of luxury retailers line the street in the commercial district of Central, Hong Kong. (Photo by Jennifer Lo)

HONG KONG Retail sales here started growing again in March, ending a two-year decline, as mainland Chinese tourists have been shunning South Korea to shop in the former British colony.

Retail sales hit 35.7 billion Hong Kong dollars ($4.58 billion) in March, rising 3.1% on the year. That compared with a 5.7% sales decline in February, according to official statistics released on May 5. Still, first-quarter sales slid 1.3% from the same period a year ago.

The turnaround in March was due to an 8.4% increase in sales of luxury goods, such as jewelry and watches. Sales of other items popular among mainland tourists, such as cosmetics and medicine, climbed 3.5%.

Consumer durables, including mobile phones, were another bright spot, with sales growing 9.5% from a year earlier. Sales of vehicles rose 16%, driven by a rush to buy electric cars before a tax break ended in March. However, sales of electrical goods and footwear remained sluggish, falling 18% and 4.5% respectively.

A government spokesperson credited the overall improvement to a "continued recovery of visitor arrivals" and "robust local consumption demand" driven by a favorable job market.

As tensions between Beijing and Seoul continue to escalate over the installation of a U.S. anti-missile system in South Korea, more mainland tourists are turning to Hong Kong. In March, mainland arrivals surged 10.4% on the year, resulting in a near 9% increase in overall visitors. In the same month, Beijing banned Chinese tour groups from visiting South Korea.

The three-day Labor Day holiday that ended May 1 saw Hong Kong teeming with visitors. A total of 490,000 Chinese tourists flocked to the territory during the mainland's annual shopping spree, representing a five-year high and a nearly 4% increase on the year.

The latest statistics from WeChat Pay, the mobile payment system owned by China's Tencent Holdings, showed that Hong Kong outstripped South Korea for the first time with the most cross-border transactions made by mainlanders during the national holiday.

"Hong Kong is set to benefit from the situation in South Korea in the short run," said Thomson Cheng Wai-hung, chairman of the Hong Kong Retail Management Association. "We might be a step closer to bottoming out."

But Cheng suggested that the biggest retail downturn in Hong Kong since the Asian financial crisis in 1997 might be far from over, citing the impact of short-term and seasonal factors. The association maintains a forecast of a mild 2% to 3% contraction in sales for the year.

Not all retailers benefited hugely from the sudden surge of tourists. During the Labor Day holiday, Hong Kong cosmetics chain Sa Sa recorded a 1% sales decrease at stores open for at least a year even though sales attributable to mainlanders grew 4% on the year.

"Sales to local customers remained flat, reflecting persistent outbound travel of Hong Kong residents during the long weekend due to the strength of the Hong Kong dollar," said Sa Sa Chairman Simon Kwok Siu-ming on May 4.

Premium rival L'Occitane is having a harder time as mainland tourists tighten their belts. The French beauty brand saw an 11% sales plunge in Hong Kong in the year ended in March, making the territory one of its worst markets in Asia.

Jewelers were a standout despite China's slowing economy and the launch of an anti-corruption campaign by President Xi Jinping a few years ago.

In the January to March quarter, Chow Tai Fook Jewellery Group reported positive same-store sales growth of 4% in Hong Kong and Macau, after three years in negative territory. Sales of gold products jumped as much as 19% as pricier gold raised the average selling price.

Smaller peer Luk Fook also saw a stronger quarter. While overall sales grew 2% after 12 consecutive quarters of decline, same-store sales of its jewelry products saw surprising double-digit growth from a year ago. Company Chairman Wong Wai-sheung attributed the results to "a relatively low base" and "an encouraging improvement" in the Hong Kong market.

Some market watchers share the optimism. "Higher marriage rates will further lift jewelry sales as 2017 is a good year for getting married from a feng shui point of view," said Nomura analyst Emily Lee in an April report.

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