Trouble in the Great Mall of China?

Spending by wealthy Chinese tourists has become such a boost for stores in major capitals in Paris, London and Hong Kong in the past couple of years that it is hard to imagine the world of luxury without them.

But, by focusing on the exaggerated effects on Hong Kong's retail sector, UBS economist Silvia Liu has underlined just how extraordinary the growth in 2010 and 2011 was. It was driven by an increasingly relaxed approach by the Chinese government to overseas travel by its citizens and the mainland Chinese love affair with luxury.

Situated at the very tip of China, Hong Kong was the biggest beneficiary. As Liu shows, hotel rooms in the city are harder and harder to come by – occupancy rates at mid-priced hotels in Hong Kong hit 93 per cent in 2011. This pricing power on the part of hoteliers has driven up prices by 100 per cent over three years at Disney's hotel at its theme park, for instance.

This has also led to a very skewed retail market in Hong Kong's downtown area – 18 of the 36 shops that are on the busiest retail strip of the Queens Road sell watches and jewelry, notes Liu. Spending on these products  in the city jumped 40 per cent in 2010 and 2011, compared with an annual rate of 14 per cent between 2006 and 2009.

If this sounds too good to last, it now looks like it can't keep going in Hong Kong at least, according to an article in Monday's South China Morning Post. A shortage of hotel rooms in Hong Kong is starting to slow the growth of Chinese visitors who stay overnight. Liu predicts visitor arrivals will slow to six to seven per cent in the next couple of years, down from 22 per cent in 2010 and 2011.

For Hong Kong's retailers slower growth in the shop-till-we-drop mainland tourist will come at a time when the local Hong Kong residents are likely to rein in their spending as well. This is in part because they have spent the HK$ 6,000 hand-out given to all permanent residents of the city by the government in the budget of 2011.

Domestic spending seems poised to slow as the effects of the eurozone crisis ripples through  Europe. Luxury retailers in Milan, Paris, London and Brussels might do well to ensure hotel rooms at mid-priced hotels stay reasonable, visa officers and tourist boards are geared to attract more mainland Chinese. Hong Kong's loss could be Europe's gain.

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