China’s Shoppers Sling a Gucci ‘Lifeline’ to Faltering Hong Kong Economy

Queuing outside a Louis Vuitton shop in Hong Kong, Lin Shasha says she’s visiting from Shenzhen to buy leather belts and handbags because the products are genuine and her yuan goes further.

Lin, 30, is among the millions of Chinese visitors driving a retail-sales boom in Hong Kong even as weakness in global demand threatens to tip the city into its second recession in three years. A 25 percent increase in sales for the first seven months was the biggest since data began in 1981, the statistics department said in an e-mail yesterday.

Tourists from China are “a crucial lifeline for Hong Kong’s economy,” said Donna Kwok, a Hong Kong-based economist at HSBC Holdings Plc. “Hong Kong shoppers seem immune to inflation and global financial market turmoil.”

A stream of customers in Tsim Sha Tsui’s Canton Road yesterday carrying bags of Vivienne Westwood, Gucci and Burberry brand products and speaking in Mandarin, showed that a $350 billion decline in the value of stocks in China since mid-April has failed to kill off the tourist trade. Their spending may help to limit what Morgan Stanley and Daiwa Capital Markets say is set to be a second straight quarterly contraction in Hong Kong’s economy.

In July, sales jumped 29 percent to HK$35.2 billion ($4.5 billion), also a record gain excluding January and February figures that are distorted by a Lunar New Year holiday. Sales of jewelry, watches and clocks soared 52 percent from a year earlier. For electronics, the increase was 65 percent.

Spending Power

Besides the increase in the value of sales, volumes also rose by records in the first seven months and in July alone, excluding the seasonal distortions, the government says.

A gain in the past two years of about 8 percent in the yuan against Hong Kong’s dollar, which is pegged to the U.S. currency, has boosted the spending power of shoppers from China. Some of those visitors, including Lin, say that items in Hong Kong are less likely than in China to be counterfeit. In addition, buyers avoid the Chinese government's taxes on luxury goods.

The number of visitors from China surged 33 percent to 2.68 million last month from a year earlier, Hong Kong Tourism Board figures show.

Visitors from China staying one night or more spent an average of HK$7,453 ($956) each per trip last year, the highest amount of any group, according to the Hong Kong Tourism Board. The nation also provided the top spenders in the same-day category at HK$2,356 each.

‘Bullish’ on Gold

Chow Sang Sang Holdings International Ltd. (116), a Hong Kong- listed maker and retailer of jewelry, said this month that its sales of gold ornaments in Hong Kong and China jumped 37 percent by weight in the first half of the year because of “pervasively bullish” sentiment even as the price of the metal soared.

Shares of Chow Sang Sang, which operates in Hong Kong, Macau, China and Taiwan, are up 41 percent this year, compared with a 12 percent decline in the benchmark Hang Seng Index. (HSI) The company’s stock rose 3.7 percent as of noon local time.

In Shanghai, Xu Qing, who coordinates tourist trips to Hong Kong for Shanghai Jinjang Travel Company, said today that Apple Inc. (AAPL) products such as the iPhone and iPad2 are at the top of clients’ shopping lists because they are available earlier in the city.

Threat From Inflation

Hong Kong reported its fastest inflation since 1995 in July as rising rents and food costs and changes to government housing subsidies boosted the rate to 7.9 percent. HSBC’s Kwok said that she sees a risk that consumers will “eventually cave in” if inflation stays high and financial markets are turbulent.

The strength of retail sales in July was “certainly a surprise” and the numbers for August and September may be weaker, said Denise Yam, a Hong Kong-based economist for Morgan Stanley.

At Daiwa, analyst Kevin Lai said yesterday that he forecasts that the city’s economy will shrink 1.5 percent this quarter from the previous three months “due to weakening global demand and intensifying global financial turmoil.”

The technical definition of a recession is two straight quarters of contraction. In April-through-June, the economy shrank 0.5 percent from the previous quarter as export growth slowed.

Lin, who is a saleswoman, emerged from the Louis Vuitton outlet empty-handed, saying that as a frequent visitor she wasn’t in a rush to buy and would continue her search elsewhere.

“I know nothing about Hong Kong’s economy, but it seems to me it must be doing well -- the shops that we visit are always so crowded.”

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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