Tourist spending to be slashed by 2.3% as new visitor permits take bite

That's a whopping $11.5b.

News sources have said the Shenzhen municipal government will likely limit Mainland Chinese visitors who travel to HK via multiple-entry permits to only once a week, starting mid-April.

According to a research note from Bank of America Merrill Lynch, only Shenzhen permanent residents are allowed to hold multiple-entry permits, which used to enable them to make as many trips as they want to HK.

This restriction could effectively cut the number of multiple-entry permit holders visiting HK by around 30%, thereby helping to avoid abuse by parallel-goods traders.

A likely 2% hit to HK retail sales would happen due to the development, according to the research note. Bank of America Merrill Lynch expects there will be a 230bps hit to retail sales growth if multiple-entry permit IVS visits are only allowed a maximum of one entry per week.

Hence, Bank of America Merrill Lynch is slashing its recently revised retail sales forecast further to -5.8% yoy (from -3.5% yoy) to take into account of the potential deterioration in underlying fundamentals.

Here's more from Bank of America Merrill Lynch:

But actual hit may be less - We note that the actual hit may be less, since these visitors can raise their spending per visit to partly compensate for a lower number of visits.

Also, the negative impact will probably kick in a few months later, as the cap will only be implemented on new applicants, while current permit holders can still come to HK with no restrictions until their permits expire (each permit has one year of validity).

Further, the potential drop maybe offset by stronger local domestic demand, as wealth effect of recent stock market rallies slowly gain traction in the economy.

According to our estimate, total tourist spending takes up about 38.3% of total retail sales while spending by local residents accounts for a larger proportion at about 61.7% of total retail sales.

Scenario analysis: Impact of permit curbs on retail sales - According to official figures, there were 14mn IVS visitors who travelled to HK using the multiple-entry permits in 2014, accounting for about 23% of total 60.8mn visitor arrivals and about 29.6% of total Mainland visitor arrivals.

Meanwhile, within these 14mn visitors, there were actually only 1.7mn persons crossing the border, suggesting that on average, each permit holder crosses the border about 8-9 times per year.

Our base case scenario made the following assumptions: 1) This tighter control will likely slash the number of ‘multiple-entry permit holders’ visitors by 30% (as mentioned by news sources); and

2) Assume they all spend about the same amount as the average per capita same day Mainland tourists (2014 Jan-June estimate at HK$2750).

This suggests that the restriction in multiple entry permits will cut total spending by about HK$(2750*4.2mn) = HK$11,550mn, i.e. about 2.3% hit to our estimated HK retail sales in 2015.

We note that the actual hit may be less, since these visitors can raise their spending per visit to partly compensate for a lower number of visits.

Also, the drop may be offset by stronger domestic demand, as wealth effect of recent stock market rallies slowly gain traction in the economy.