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Chinese tourists are rapidly deserting Hong Kong, leaving retailers who built businesses around once insatiable demand from mainland neighbors with bigger but emptier stores and squeezing the whole city's visitor-dependent economy.
With cross-border tensions exacerbated by pro-democracy Hong Kong protests, tour groups visiting Hong Kong from China plunged about 80 percent in early March. A Beijing crackdown on conspicuous spending by mainlanders also shows no signs of letting up, sending tourists further afield.
While daytrippers from just outside Hong Kong continue to buy daily essentials there, Chinese travelers with cash to burn are homing in on places like South Korea and Japan. According to the Japan National Tourism Organization, Chinese visitors lured by the weaker yen and easier visa rules nearly tripled in February to a monthly record: With one in four tourists in Japan, Chinese became the biggest visitor group in a country with which relations have often been fraught.
That's bad news for Hong Kong retailers like Chow Tai Fook Jewellery and cosmetics chain Sa Sa International Holdings Ltd. To the chagrin of some Hong Kongers, these firms expanded networks in the former British colony by about 50 percent over the past five years to cater to then-surging demand from Chinese tourists.
"The old shops are squeezed and replaced by chain stores like Chow Tai Fook, Sa Sa and other popular shops for them (mainland buyers)," said one 22-year-old Hong Kong shopper, who gave his surname as Yu. "That is crazy!"
While some Hong Kong residents accuse mainland tourists of pushing up prices and clogging already crowded streets, resentment rides high also on the other side of the border. Many have expressed shock, saying Hong Kong people are rude and pledging to take their money elsewhere, with some Internet users going so far as to post pictures of Hong Kong re-entry permits cut into pieces.
Destination South Korea?
The net effect is a tourism slowdown that leaves a gaping hole in an economy where Chinese visitors - 47 million last year, about 40 percent of them from areas beyond border zones - account for about a third of retail spending.
In a report this week, Credit Suisse cut its economic growth forecast for Hong Kong to 1.6 percent from 2.4 percent for this year, citing weaker mainland tourist spending, and rated stocks dedicated to the city "underweight".
Chow Tai Fook, the world's largest jewelry retailer, has so far relied on mainland Chinese for nearly 60 percent of its sales in Hong Kong and the nearby casino hub of Macau. At Sa Sa, reliance is even bigger, with mainlanders accounting for 71 percent of its sales in Hong Kong and Macau.
But as tensions grew last year, even before Hong Kong's 'Occupy' pro-democracy protests, Chow Tai Fook pointed the way toward one option for Hong Kong retailers: It opened its first point of sale in South Korea's popular tourist destination Jeju island last September, and said it's looking at further expansion overseas to tap affluent Chinese tourists.
Like Japan, South Korea is a big beneficiary thanks to its currency weakening even as the strength of the U.S. dollar eroded competitiveness in Hong Kong - its currency is pegged to the greenback. More than 6 million mainland Chinese visited South Korea last year, up 42 percent from 2013, spurred by an easing of visa rules.
In Hong Kong, observers are bracing for a chill settling over the city's stores for some time.
"We are going to see very weak data from May 1 (Labor Day holiday)," said Renee Tai, analyst at UOB Kay Hian in Hong Kong. "It will be a cold winter for retail this year."