China’s duty cut move leaves Hong Kong in a quandary | business | Hindustan Times
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China’s duty cut move leaves Hong Kong in a quandary

business Updated: Dec 23, 2011 20:51 IST
Alex Frew McMillan

Last Christmas, Fion Ng had an unusual request from a mainland Chinese customer at the high-end cosmetics store she manages in Hong Kong’s Causeway Bay district, the most expensive place to rent a shop in Asia.

“Is this really the most expensive cream?”

The shopper from Shanghai was eyeing a product that sells for $390 (US) a jar. And she wanted to talk up the price, not haggle it down. “If not, I will be really embarrassed if my friends find out.”

Assured that the Spanish royal family uses the same Eternal Youth cream, she snapped up 10 jars for gifts. This year, she returned and bought another five.

The daily waves of high-end shoppers from mainland China has turbo-charged sales at shops in Hong Kong and driven the fastest retail rent increases in the world.

However, a bid by Beijing to keep shoppers inside mainland China threatens that wave and the rent surge Hong Kong shop landlords have enjoyed.

China is considering cutting or scrapping import duties on luxury goods to keep shoppers within the mainland. If the move succeeds, Hong Kong’s retail property rents would be hit hard, as would profits at real-estate companies.

“Everyone would be affected,” said Paul Hart, executive director at brokerage Knight Frank. “All the big developers have got exposure to high-value retail that attracts mainlanders.”

China is working to keep shoppers at home to boost domestic consumption and cut dependence on exports to drive its economy.

China’s tariffs run as high as 45% for cosmetics and 43% for high-end watches, driving many rich consumers to shop in Hong Kong, London and Paris, a trend the Chinese commerce ministry wants to change.

While a final decision on duty cuts remains unclear, Hong Kong landlords are bracing for an inevitable hit, as two of every three visitors to Hong Kong, who drive 40% of its sales, are from mainland China.

Even a slight cut in duties will lead to as much as 20% drop in shoppers from China to Hong Kong, said Andrew Lawrence, Hong Kong property analyst at Barclays Capital.