Hong Kong Retailers Get Squeezed by Weak Yuan: Chart

Hong Kong retailers squeezed by China’s economic slowdown and the world’s second-highest rents now have something new to worry about: the weakening yuan.

The CHART OF THE DAY tracks moves in the Hong Kong dollar versus the yuan alongside changes in the city’s monthly retail sales, which sank 3.9 percent from a year earlier in December. The lower panel shows the two-year performance of Chow Tai Fook Jewellery Group Ltd., the city’s biggest jeweler by market value, and Sa Sa International Holdings Ltd., the largest listed seller of cosmetics, against the MSCI Hong Kong Index.

The yuan fell on Monday to its lowest level since October 2012 versus the Hong Kong dollar, which is pegged to the U.S. currency. A weaker yuan makes overseas products more expensive to mainland shoppers, who account for about a third of all retail sales in the former British colony. Hong Kong leader Leung Chun-ying said last month the government is considering whether to restrict the number of mainland visitors amid protests against overcrowding in towns near the border.

“The yuan is likely to continue to depreciate,” said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong. The currency’s move “will no doubt affect the already ailing retail sales in Hong Kong in part due to the animosity between the mainland and the city.”

The Chinese currency may drop a further 2 percent by the end of the year as the government allows depreciation amid monetary easing, according to Barclays Plc. Retail sales in Hong Kong fell 0.2 percent last year, the first decline since 2003, as China’s anti-corruption campaign and slowing economy damped demand for luxury goods. Retail rents in Hong Kong’s Causeway Bay were the world’s second-most expensive last year, behind New York’s Fifth Avenue.

Chow Tai Fook sank last week to its lowest level since July 2013 after reporting a 29 percent drop in same-store sales in Hong Kong and Macau during the period around the Lunar New Year holidays. Sa Sa, with more than 100 stores in the two cities, has plunged 47 percent in two years. The Hong Kong dollar has appreciated against 30 of the world’s major currencies in the past six months as the U.S. moves closer to reducing stimulus.