What Hong Kong will be like when bull market ends

April 15, 2015 16:10
Hong Kong could be facing the triple whammy of declining mainland visitors, a cooling bull market, and a peaking property sector. Photo: Bloomberg

The bull market will help create jobs and wealth in Hong Kong, and offset the negative impact of a sluggish tourism sector.

However, the city could be facing a triple whammy in the coming years.

Chinese authorities have warned of a triple blow for the nation’s economy as it faces slowing growth and the impact of economic restructuring while absorbing the effects of government stimulus at the same time.

For Hong Kong, the triple whammy will come in the form of declining mainland visitors, a cooling bull market, and a peaking property market.

The recently announced “once-a-week visit" scheme, which has replaced the multi-entry visas from Monday, may help in the crackdown on rampant parallel trading. That is of little significance as parallel trading has a very limited impact on job and wealth creation. However, the move will help ease relations between Hong Kong and the mainland.

What’s really worrying is that the city is gradually losing its competitive edge as a duty-free port as the mainland reduces tariff, sets up more free trade zones and eases cross-border online shopping.

We’ve already seen luxury goods and high-end catering running out of steam since last year. The anti-corruption campaign may have partially contributed to that. Besides, mainland consumers are having more choices to access duty-free luxury products.

This group of middle-income and high-end visitors used to splurge in Hong Kong. They would stay in decent hotels and spend money on various activities. Their economic contribution is more than 10 times that of parallel traders.

However, the number of mainland Chinese cities allowing individual visitors to Hong Kong has been capped at 49 since 2007.

Many of the big-spending Chinese have already come to the city more than once. And now they could save money by switching to mainland duty-free stores or engaging in cross-border online shopping. Or they could just fly to Tokyo, Paris or London instead. Hong Kong is no longer that attractive for them.

Therefore, Hong Kong should attract more new visitors and open up the individual visitor scheme to more cities while cracking down on parallel traders. The city should also target high-spending mainlanders in cities within the "one-hour living circle".

However, all these proposals look like a mission impossible given the political environment in the city at present.

As such, I’m quite optimistic on the peak level of this bull market, but more conservative on the length of the rally.

If the market rally halts within one or two years, and then moves downward sharply, that could cause a “negative wealth creation” impact. Hong Kong residents should grapple with this harsh reality along with the falling number of mainland individual visitors.

Also, the housing market is also widely expected to level off. The question is when it will happen and how fast.

The US Federal Reserve would raise interest rates next year at the latest, and new housing supply will reach 74,000 units in the next three to four years. That could be the turning point in the housing market.

An economic downturn is not far from us if all the three whammies come true within one to two years.

Individuals, corporates and the government should not indulge too much in the currently booming market, and look for new opportunities before big mainland cities play the catch-up game.

This article appeared in the Hong Kong Economic Journal on April 15.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal columnist