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Hong Kong economy

This is what Hong Kong retailers must do to maintain edge as China announces fifth round of import tariff cuts

Average duties on 1,449 imported products ranging from cosmetics to home appliances to be reduced from July 1

PUBLISHED : Wednesday, 06 June, 2018, 6:32am
UPDATED : Wednesday, 06 June, 2018, 6:32am

The latest round of import tariff cuts by Beijing is a fresh reminder for Hong Kong to improve its quality of service as well as retail experience, if it wants to continue to attract Chinese tourism spending despite a rapid erosion of any price advantage it enjoys versus the mainland, said analysts.

China announced last week it would reduce the average tariff rate for 1,449 imported products – ranging from cosmetics to home appliances – from 15.7 per cent to 6.9 per cent, effective July 1. This could affect how and where mainland visitors to Hong Kong, who make up a third of the total visitors to the city, and have been instrumental to the recovery of its retail sector since last year, spend their money.

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Hong Xueyu, an analyst at Guotai Junan Securities, said the city will need to introduce improvements in quality as well as attractive tools such as mobile payment options more quickly, as mainland shoppers come to Hong Kong not just for the better prices, but also the shopping experience.

The prices of consumer goods in Hong Kong have lost much of their attraction
Hong Xueyu, analyst, Guotai Junan Securities

“The prices of consumer goods in Hong Kong have lost much of their attraction,” said Hong. “Plus consumers will have to consider the extra money spent on travelling to the city.”

“We believe Chinese consumers are now travelling overseas not just for shopping but also for the experience. And they shop here in Hong Kong also for good quality, not just prices,” said Jessica Ye, an analyst at Jefferies in Hong Kong. She said the impact on items such as cosmetics, medicine and baby diapers would be more, as compared to jewellery, because the tariff cuts affect mostly daily supplies.

The cuts are aimed at stimulating domestic consumption, long held by the Chinese leadership as a new growth engine for its economy. Domestic consumption is expected to offset a slowdown in investment brought on by Beijing’s continuing deleveraging push.

China has now lowered import tariffs imposed on consumer goods five times since 2015. According to former vice finance minister Zhu Guangyao, the cuts have been aimed at “attracting consumers to flock back from overseas [markets]”.

And while Hong Kong enjoys zero tariffs and lower tax rates, it should get ready to improve its mix of goods and quality of services to better serve a more sophisticated Chinese clientele.

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“Given the relatively small scale of the drop relative to the goods’ retail prices, Hong Kong retailers might not find it too difficult to reduce their operating costs to maintain their comparative price attractiveness versus China for now,” said Pascal Martin, partner at OC&C Strategy Consultants. A 7 per cent average drop in duty on imported wholesale prices might only enable a 2 to 3 per cent drop in Chinese retail prices.

“So the implication for Hong Kong is not only the price gap, but more importantly, how to accommodate an upgrade in consumption in the long term. Which is more of a price/mix shift,” he said.

Moreover, China typically imposes three types of taxes: tariffs; a value-added tax, which amounts to 17 per cent on average; and consumption tax. And while Beijing has slashed tariffs, the VAT and consumption tax remain in place and will continue to contribute to a difference in prices of goods between Hong Kong and mainland China.

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The tariff rate only accounts for 0.5 to 0.7 per cent of an imported goods’ final price, according to China’s Ministry of Finance, and thus the cuts will only have “a very limited impact” on lowering prices, the ministry said at the end of last year, during the announcement of a fourth round of cuts in import tariffs for 187 consumer goods.

Zhu, the former vice finance minister, also said at the time of the announcement that while the cuts were expected to lower the overall prices of imported goods in China, for middle to high-end consumer merchandise, the final price would still be “several times their imported price” due to many factors.