HING KONG OUTLOOK: TOUGH YEAR

Byline: Vicki M. Young

NEW YORK — The retailing environment in Hong Kong will be bearish for at least a year, according to retail analysts there, who are predicting that luxury goods will suffer most.
Alan Wong, a retail analyst at W.I. Carr in Hong Kong, said that “while most of the damage is done, the market is not settled at any point.” He expects that market skirmishes will continue “here and there.”
According to Wong, the hardest hit will be the luxury goods sector because consumers who become cost-conscious will not be in the mood to splurge. “The economy might not recover for two years, and it could take a year to get over the shock,” Wong said.
The Hong Kong market’s Hang Seng index plummeted more than 10 percent on Thursday, with a cumulative drop of at least 23 percent over a five-day period (see related story, page 30). On Friday, the market rebounded 7 percent, but analysts are expecting a prolonged bear market.
Stephanie Wang, a retail analyst at HSBC James Capel in Hong Kong, said the “retail environment could remain bearish for a year, possibly 18 months.” Wang explained that there are two contributing factors: the continued decline in Japanese tourism to Hong Kong, and the devaluation of the currencies in neighboring Southeast Asian countries. “Any Hong Kong considerations that might arise could produce a triple effect,” Wang added.
Thursday’s market crash occurred because the “government was defending the Hong Kong currency,” Wong said. He explained that the government was selling U.S. dollars and buying Hong Kong dollars. The market was also reacting to the devaluations of currencies in other Asian countries.
Hong Kong is the only Asian region that is still pegged to the U.S. dollar, and has been since 1983. When Thailand floated the baht on July 2, it sparked currency turmoils throughout Asia.
According to Wong, Thailand found it hard to compete with other manufacturers while its baht was still pegged to the U.S. dollar. “Thailand’s costs kept going up, there was no corresponding export, and the goods became too expensive, which caused the currency to be overvalued,” he said.
The value of a particular of currency determines how much can be bought from others as well as what can be sold abroad. Thailand’s high currency, explained Wong, made it cheaper to import goods, but that hurt the country’s own manufacturers, who wound up competing with imports. Devaluation of the baht allowed Thailand’s manufacturers to become more competitive.
Analysts said that the devaluation of the baht caused a rippling effect in which other overvalued Asian currencies also became devalued. Those countries in clude the Indonesian rupiah, Korean won, New Taiwan dollar, Singapore dollar, the Philippines’ peso and the Malaysian ringgit.
Concern over whether the Hong Kong dollar would be floated fueled the market gyrations. Analysts believe the Hong Kong dollar will remain pegged to the U.S. dollar. According to Wong, the “Hong Kong dollar can’t be floated because once that’s done, confidence in the Hong Kong dollar will evaporate.” The view among analysts is that Hong Kong won’t convert to the Chinese yuan because the banking system is not strong enough and the Chinese currency is not freely converted.
Still, key to the retailing environment is the decline in Japanese tourism.
HSBC’s Wang said there had been an expectation that by the middle of next year, when the new Hong Kong airport is set to open, tourism would be on the rise. “That’s probably not the case now,” she said, in view of recent market concerns.
W.I. Carr’s Wong noted three reasons why the Japanese tourists are not heading for Hong Kong: safety concerns connected to the July takeover by Communist China, negative information in the press on hotel price gouging, and the high prices in Hong Kong versus the weak Japanese currency.
Shirley Chan, retail analyst at Hong Kong’s Nikko Research Center, pointed out that a large percentage of the consumer spending in Hong Kong is from the Japanese. According to Chan, there is a “sluggish sentiment” right now and she expects that to continue. Chan also noted that the economy would be further affected “if the Chinese or Taiwanese should stop spending.”
The analysts said that the locals will continue to spend, but will probably cut back a little. The tourist trade, which affects the luxury goods retailers, will get hit the most.
Tamara Robinson, a retail analyst for Salomon Bros. in Hong Kong, said that DFS will get hit the hardest of the luxury retailers. “The locals do not shop at DFS,” said Robinson, who explained that DFS thrives on Korean and Japanese tour groups who enter Hong Kong just to shop.
Other analysts also noted that DFS is “merely a one-stop shopping experience,” with its many luxury retailing concessions filled with salespeople who are able to speak the language of its “tour group clientele.”
Robinson pointed out that Hong Kong’s top shopping areas where luxury retailers and top designers have their boutiques are Hong Kong Island and Kowloon locations that are geared toward heavy foot traffic. Hong Kong Island’s top shopping sites are Pacific Palace, Causeway Bay, the Galleria and Times Square Mall. Kowloon’s big site is the Ocean Terminal. Those areas also house some big-name hotels, but if tourism declines then the poor foot traffic would have an impact on retail sales.
The hope, said Wong, is for Hong Kong to become more attractive for tourists. Even if capital starts to come in from other countries such as Europe, it would do so only if the Hong Kong prices drop. Wong thinks it could take “several months to bring the prices down.”

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