Long live the “walking ATM’s”: Hong Kong's retail sales surge 24%

HK retail sales have been booming, reporting 24% growth in the first half of 2011. In particular,jewellery and watch retail sales value has posted strong growth at 50% in 1H 2011 and this segment has been outpacing overall retail sales growth since mid-2009. Part of the demand is obviously local but the bulk in high-end watches and jewellery is driven by the so-called “walking ATMs”, Chinese mainlanders usually paying cash.

The latest data for HK July 2011 retail sales exceeded expectations, as retail sales rose 29.1% in value, which is an acceleration vs. the 28.8% rise in June. Sales of jewellery, watches, clocks and valuable gifts rose 37.0% y-o-y. HSBC economist Donna Kwok estimates visitors from China could account for up to half of local net revenues for some HK retailers. In July, while non-mainland visitors contracted 0.7% month-on-month, visitors from the mainland were up 5%.

Although Donna is predicting a slowdown in Hong Kong retail sales in 2H 2011, forecasting 16-17% growth for the full-year 2011 primarily affected by high inflation, there has not been a slowdown in spending thus far in the year and we think that consumers who buy luxury goods (e.g., mainland tourists, high-income local residents) are relatively insulated from inflationary pressure. Therefore, we think demand for luxury goods from high-end consumers should be resilient.

Mainland tourists spend across Asia

We think mainland tourists will continue to be a major contributor to retail sales in the Asia region. We find that more and more mainland residents are discovering the joys of travelling, with the  number of residents departing the mainland growing at a 10.7% CAGR for the past 5 years.

As our economist Frederic Neumann mentioned in his recent report, intra-regional travel within Asia has been boosted by Chinese tourists, as seen in the chart below, and their spending can help to offset exports to the West. In another report, HSBC predicted that the annual number of Chinese outbound tourists could rise from about 50 million currently to over 130 million in 2015 and possibly top 200 million by 2020.

These “walking ATMs” are spreading across the region and we think that they will continue to fuel luxury consumption abroad. In addition to buffering other Asian economies, travel can increase consumers’ exposure to brands and fashion trends. As more mainland tourists travel abroad, they are also potentially learning more about luxury and may develop into more discerning consumers.