The Challenge Of Parallel Trading In Hong Kong

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The Challenge Of Parallel Trading In Hong Kong by Dan Steinbock, ChinaDaily – Reprinted with permission

This week the Ministry of Public Security took action to restrict visitors to the Hong Kong Special Administrative Region after the increase in day-trippers and traders buying goods in the city led to weeks of protests. As Shenzhen authorities announced a limit on cross-border trips by the city’s residents, Hong Kong Chief Executive Leung Chun-ying issued a warning against parallel traders. Concurrently, the multiple-visit permit will be replaced by a new one-visit-per-week permit.

What will be the effect of the policy change?

“Parallel traders” buy their supplies in Hong Kong, which does not charge a goods and services tax, and then sell them on the mainland in small quantities to avoid paying import duties. The trading focuses mainly on packaged foods, infant products, cosmetics and personal care items, such as shampoo. It is not exactly a luxury business.

One friction point involves Sheung Shui, a town close to Shenzhen, where residents claim that the increase in parallel importers has pushed up retail prices and is causing nuisance. In contrast, the importers argue that their trade benefits Hong Kong’s economy and they do have a point.

Will the policy changes reduce the number of parallel traders?

In 2014, Hong Kong received some 47 million visitors from the mainland, which accounted for three out of every four visitors. Day trips accounted for a record 60 percent of the total and contributed to a third of all retail sales in Hong Kong.

But things may be changing.

During the Chinese New Year, the number of visitors fell for the first time in two decades. And during the Tomb Sweeping Day holiday, arrivals from the mainland plunged 14 percent. In 2014, the current multiple-entry scheme drew 14.9 million visitors from the mainland. The new policy could slash their number to 4.6 million a year, that is, by 30 percent. Will Hong Kong’s economy suffer as a result of the policy change?

Presumably, the policy targets mainly the “career parallel traders” and won’t affect Shenzhen residents who have been granted multiple-entry visas into Hong Kong.

Nevertheless, Goldman Sachs expects Hong Kong to suffer a 5 percent reduction in tourist spending, while Credit Suisse has lowered the city’s GDP growth forecast from 2.4 percent to 1.6 percent in 2015.

As day-trippers are estimated to account for 15 percent of retail spending in Hong Kong, their significant reductions could have an adverse impact on cosmetics, food and alcohol sales, as well as on malls and restaurants. In the first two months of the year, tourist arrivals from the mainland to Hong Kong soared 16 percent year-on-year, yet retail sales were up barely 2 percent from the previous year.

In effect, parallel trading may be a disguise for very different issues. After all, recent estimates suggest that up to 60 percent of parallel traders are in reality Hong Kong residents.

Moreover, Hong Kong’s role as a “gateway” to the mainland is changing. In the past, it was the place to visit for the wealthy mainland residents who flocked to the city to purchase luxury items. That era is gone.

Last year, spending on luxury items plunged 14 percent. Today, wealthy mainland residents prefer Japan, the Republic of Korea and European countries, which actually compete for the visitors from the mainland.

As reforms accelerate on the mainland and free-trade zone policies proliferate across its megacities, the benefits of Hong Kong’s role as a gateway city will diminish. Consequently, the city needs a strong leadership to communicate the vast benefits of visitors from and economic relations with the mainland.

What Hong Kong needs are policies to support its current level of productivity, growth and prosperity. It does not need self-induced economic challenges that risk dooming it to stagnation and irrelevance.

The author is research director of international business at the India China and America Institute (USA) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).

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