Hong Kong's retail sales surge to 21% in two months

What stands out? Retail sales just keep surprising to the upside. After expanding consistently at a brisk rate of 15% y/y since 2010, real retail sales surged and grew at a record 21% y/y in the first two months of 2Q11. These paces of growth are probably hard to repeat; but with tourist spending, in particular Chinese tourist spending, now accounting for half of the sales, as long as tourist arrivals continue to grow steadily, the retail sector should remain well supported.

Thanks to Chinese tourists…and maybe ‘Apple’?

What drove the surge in April and May? First and foremost, tourists, in particular Chinese tourists with 60% of total arrivals, were doing the heavy lifting. In part boosted by the launch of year-round multiple entry visa arrangements for Shenzhen residents in 2Q 2010, Chinese arrival growth, especially individual visitors, which accounts for over 60% of arrivals, accelerated not just during the Labour Day holidays but also the whole of April and May.

The arrivals of Shenzhen residents with multiple entry permits, or 30% of total IVS, surged almost 50% y/y during the Labour Day holiday, according to the tourism board. This is an indication that, with the added benefits of an appreciating RMB, Shenzhen residents are taking full advantage of the multiple visas to shop across the border in HK.

The sales of tourist related items thus boomed in April-May. For instance, jewellery and watches, with 19% of total sales, increased 44% y/y (34% in 1Q11); clothing and footwear, with 13% of total sales, increased 28% y/y (18% y/y in 1Q11); electrical goods and photographic equipment with 8% of total sales, increased 44% y/y. Given these sales trends, it should come as no surprise why jewellery and watch stores have now occupied all the prime shopping locations in HK.

Second, perhaps the roll out of Apple’s killer product—iPad 2—in late April also helped. This could have partially explained why the sales of electrical goods (cover sales at such outlets as Broadway) and other consumer durables (cover sales at specialized computer stores, such as the Apple Store) were so spectacular.

Retail sector remains well supported
Looking forward, retail sales could come off the elevated pace we have seen the past quarter. But as long as Chinese arrivals continue to grow steadily, the retail sector should remain well supported. The flip side is also true though; the reliance of Hong Kong’s retail sector— which has admittedly increasingly tailored itself to serve the Chinese tourists rather than the locals—on one single driver also makes it ever more vulnerable to an event shock.