Retailers need more than cash-flashing mainland tourists

The dizzy chronicle of Hong Kong's retail revival at the hands of free-spending mainland tourists is being updated almost daily - first spending limits were raised and now they come across the border with freshly minted credit cards.

As wider optimism returns, government officials repeat that the scourge of deflation is almost over and the Hong Kong Retail Management Association forecasts single-digit growth in retail sales this year.

But if things are really on the up, Blockbuster's decision to quit the territory and Wing On's closure of stores in Hunghom and Kowloon Bay appear, at the very least, a disturbing coincidence. With the economy on the cusp of a reflationary recovery, why are retailers choosing now to up stakes?

Some of the answers lie in the unbalanced taming of Hong Kong's insidious deflation cycle. The government's Consumer Price Index, comprising a basket of widely consumed goods, has always been a fairly imprecise measure of changing prices. When this index finally nudges into positive territory, the optimist's take is that rising prices are a signal of renewed pricing power and a general strengthening in economic activity.

This macro trend feeds down to retailers who should see sales and profitability improve.

This sequence breaks down if prices are rising because of cost-push inflation which cannot be passed onto price-sensitive consumers - a potentially corrosive mixture for retailer profitability.

Last year, the US dollar's slide was perceived as positive, providing an added monetary stimulus to Hong Kong and helping to put a floor under the property market. This year, the sting in its tail is higher import prices.