Get ready for rising food and petrol prices, and the number of mainland tourists, as the effects of the yuan hitting a 19-year high spills over into Hong Kong.
Inflationary risks are ballooning in the city, with the yuan peaking at 6.2371 per US dollar this week plus an influx of so-called hot money - capital attributed to the third round of quantitative easing in the US, monetary policy widely seen as a euphemism for printing money.
Amid signs that mainland China's economy is regaining momentum, QE3 has given US banks the cash to spend in Hong Kong, with its access to yuan-denominated investments.
All this has left the greenback weaker and the yuan stronger, placing the Hong Kong dollar - pegged firmly to the US currency - in an inflationary squeeze.
The repercussions are spreading across a city that relies heavily on mainland imports from flour to pork and clothes to fuel. It's good news for retailers who rely heavily on mainland shoppers but bad news for the rest of the city.
Not that shoppers may notice at first. Some retailers said yesterday they plan to try to preserve profitability, while refraining from raising prices by shrinking package size - but there were still warnings that could only last so long until costs burst at the seams and prices have nowhere to go but up.
"People would not mind or even notice if a pack of potato chips goes from 100 grams to 95 grams but they will definitely opt for other brands if prices are raised by 10 or 20 cents," said Victor Fung, marketing manager of the Edo Trading Company, which imports snacks such as potato chips, biscuits and drinks from the mainland.
To fend off punishing competition and retain customers, Fung said reducing serving sizes and using cheaper packaging will be traders' top priority.
He said shoppers should even expect to see fewer canned drinks in supermarkets as more soft drinks will be sold in plastic bottles in preference to more expensive aluminium cans.
But the downsizing strategy cannot last forever, Fung conceded, and price rises were inevitable. "It's a headache. You can't keep downsizing packaging without irritating consumers," he said. "It's unnoticeable when it drops from 100 grams to 95 grams but it is prominent when it drops to 80 grams or even 70 grams."
Other imports such as rice, flour, noodles and tinned food are also vulnerable to inflation.
"We cannot adjust prices overnight but will give a few months' lead time to supermarkets about raising prices," said Lee Fuen, president of the Hong Kong Food Council, which represents the food industry.
Lee said it was a blessing that the yuan was rising while food prices were relatively stable on the mainland: "A sudden surge in mainland food prices, like the one with pork prices two years ago, is more scary than the yuan appreciation."
Meanwhile, the local tourism industry says a stronger yuan will bring mixed blessings for Hong Kong. While Hong Kong retailers and hoteliers stand to benefit from a larger influx of mainland visitors, outbound tourists will pay more for holidays across the border.
"A stronger yuan will definitely make Hong Kong a more attractive place for mainland tourists," said Ng Hi-on, assistant general manager of China Travel Service. "It will make them feel like they are getting a big discount for whatever they buy."
Over the past couple of months, the travel agency has fine-tuned prices for inbound tours to adapt to the currency rate change. For example, Ng said, prices had been cut for a three-night Hong Kong visit - covering hotels, travel and admission tickets to some theme parks - from 2,690 yuan (HK$3,362) to 2,290 yuan.
However, Ng said it was hard to raise prices for outbound tours heading to the mainland.
"Hong Kong people have plenty of options. If we raise the price, they will just choose other destinations like Southeast Asia, Taiwan or Japan," Ng said.
"We can try to digest the extra cost by negotiating with the mainland hotels, travel agents and bus companies in the hope we can bear the cost together."
Daniel Chan Kin-pang, deputy general manager of Hong Thai Travel Agency, also said they had no plans to raise outbound tour fees. "We are going to work with more new hotels that offer lower room rates, and will see if airlines can give us more discounts," Chan said.
James Lu Shien-hwai, executive director of Hong Kong Hotels Association, expects a positive impact from the rising yuan on the local hotel industry.
"We have seen other countries, like Australia and Japan, attract more foreign tourists when their local currencies became relatively cheaper. So will Hong Kong," he said.
Ren Xiuhong, a 52-year-old tourist from Shanghai, was on a four-day tour to Hong Kong with her son specifically to take advantage of the powerful yuan.
"We have spent nearly HK$60,000 buying cosmetics and clothes. With the present currency rate, it's like getting a 20 per cent on all our purchases. The money we have saved already covers what we paid the travel agency," said Ren.
Economists are forecasting that the yuan will remain strong against the US dollar - and hence the Hong Kong dollar - at least until the end of this year. Yesterday the yuan closed at 6.2415 per dollar. Since July, it has risen more than 2 per cent. On Monday it hit its highest value since the central government unified official and market exchange rates in 1993.
Raymond Yeung, an economist at ANZ, believes the yuan-Hong Kong dollar exchange rate will stay at around 1.24 for another few weeks while the yuan floated on the strong side of its trading band against the US dollar. However, he added, investors should be mindful of a possible backtrack after the US presidential election early next month. "Hot money has no nationality," he warned.
Celine Sun, Charlotte So, Lulu Chen, Denise Tsang