Hong Kong will continue to lose its competitiveness relative to other Asian cities even if it doesn't impose a tax on goods and services.
Why is this city losing its lustre if consumers aren't burdened by the sales tax in place in other places in Asia? The answer is obvious: the sky-high cost of renting shop space here.
The operator of a Japanese restaurant in the busy Causeway Bay district explains Hong Kong's worsening problem.
"For every HK$10 of sales my restaurant makes here, HK$6 goes to the landlord. But in Tokyo, rent is the third biggest expense, after food and salaries," he said. "It's getting more and more difficult to operate a business here."
The restaurateur's observation was echoed by a friend from the Philippines and a former journalist, now based outside London, but who visits Hong Kong once every year. This friend shops regularly here because of the choice available, and, more importantly, the absence of a sales tax.
He bought a pair of popular brand name jeans for HK$900 in Hong Kong recently. Later, he found out they are sold for less in Makati, the business district of Manila, even with a 12 per cent value-added tax.
It's the high rental costs in Hong Kong that causes the price discrepancy.
Although rents in prime locations have stopped rising due to the slow down of spending by mainland tourists on luxury goods, the city remains the most expensive place in the world for retailers to open shops.
When you compare the rise in residential and shop prices in 2011 and 2012, you see that residential rents jumped 15.8 per cent last year and 3.1 per cent in 2011, according to Midland Holdings. For the same period, Savills data shows that street-shop rent in prime locations like Tsim Sha Tsui rose 25.3 per cent last year and 34.4 per cent in 2011, with rental costs in Causeway Bay surging 19.9 per cent last year and 38.2 per cent in 2011.
Fuelled by an influx of mainland tourists and limited supply of retail space, rents have soared, with international chains paying "tens of millions" of Hong Kong dollars a month in prime locations like Causeway Bay for their flagship stores.
More recently, luxury jeweller Tiffany & Co agreed to pay HK$5.7 million, or HK$1,500 per square foot, for its 3,800 square foot ground-level shop at Times Square in Causeway Bay, according to Colliers International.
To alleviate the pressure on retailers, the city should increase the supply of retail space. Otherwise, Hong Kong's reputation as a paradise for shoppers could be lost to other cities.