Hong Kong's next hurdle: fewer mainland shoppers

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Hong Kong has a dilemma: retailers depend on mainland Chinese shoppers for sales, but resentment among local residents has prompted Beijing to tighten the flow of visitors, which could hit the economy.

Mainlanders represent 84.2 percent of all visitors to Hong Kong, according to the latest Hong Kong Tourism Board (HKTB) data, and account for nearly a third of total retail sales.

But shortages caused by a steady stream of shoppers from Shenzhen, just across the border, to buy daily necessities in tax-free Hong Kong were the target of increasingly violent local protests over the past couple of months.

In response, China has limited the number of visits that Shenzhen residents can make to once a week.

That has Hong Kong's retailers worried.

"The impact of the new policy will not surface in the short run, but will have increasingly dramatic long-term effects," Hong Kong-based cosmetics retail chain operator Sa Sa International's spokesperson told CNBC by e-mail.

New realities

Retailers will take the biggest hit from the new restrictions because unlike overnight visitors, day trippers only have one purpose in Hong Kong: shopping.

Retail spending could fall by 2.5 percent to 3.7 percent, while gross domestic product (GDP) may contract by 0.5 to 1.0 percent, Capital Economics' China economist Chang Liu said in a note on Thursday.

No more unlimited entry into HK for Shenzhen citizens

Others are marginally more optimistic.

"We estimate the tightening measure will reduce Hong Kong's retail sales by about… 2 percent of the total, [which] translates into 0.09 percent [reduction] of GDP and 7,000 job losses," said ANZ senior economist Raymond Yeung in an April 15 note.

Still, some of the pain may be eased by day trippers buying more on a single trip.

If day trippers spend 50 percent more during once-a-week visits, sales at Hong Kong's retailers should only fall by 2.0 percent in 2015, according to ANZ's Yeung.

Keep them coming

The measures may not have the intended effect of attracting more so-called "quality overnight visitors", however. If anything, Hong Kong's hostile attitude towards mainlanders appears to be keeping them away: In March, arrivals from the mainland dropped by around 10 percent on-year, according to government data.

And they could stay away, analysts warned.

"The image of Hong Kong as a tourist destination for mainland visitors is adversely affected," said ANZ's Yeung.

Even a planned 80 million Hong Kong dollar ($10.32 million) advertising blitz may not be enough to repair the damage: "We are unsure how a marketing campaign can reverse the general impression of mainland residents," he said.

Instead, Hong Kong's government needs to embrace the mainlanders by, for example, building new shopping centers along the Chinese border and granting more tourist visas, experts said.

"These efforts would stabilize overall tourist arrivals and improve consumption sentiment, which will in turn drive healthy and sustainable growth of the Hong Kong retail market," said Sa Sa International.

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