Hong Kong flooded by day-trippers from China, while rich luxury shoppers go elsewhere

HONG KONG (Bloomberg) - Hong Kong wants more Chinese shoppers, just not the kind they're getting now.

The throngs of Chinese visitors snapping up Prada bags and Swiss watches in central Hong Kong are thinning out, as Chinese President Xi Jinping strengthens his campaign against graft and extravagance.

But growing are the numbers of so-called parallel traders who buy shampoo, milk powder and other daily goods to resell at higher prices in China, where concerns about the safety of local products put a premium on those from overseas.

That has put Hong Kong Chief Executive Leung Chun Ying in a quandary between the city's luxury retailers eager to see more Chinese shoppers and angry locals who accuse the visitors of pushing up the cost of necessities. Ahead of his trip this week to attend annual sessions of China's top legislative body, Mr Leung pledged to take up the issue with leaders in Beijing.

"The overall spending pattern of Chinese tourists has changed," Mr Raymond Yeung, an economist at Australia & New Zealand Banking Group in Hong Kong, said by phone. "The real issue is how Hong Kong can cope with that change."

Sales of luxury goods plunged 14 per cent last year, when the city saw its first annual drop in retail sales since 2003. The decline has continued into January, with total expenditure down 14.6 per cent from a year ago.

With Chinese tourists making up 78 per cent of Hong Kong's visitors last year, their changing composition ripples through the economy and drags down luxury-goods companies including Chow Tai Fook Jewellery Group and Prada SpA.

Instead of rich Chinese flying in, the city is seeing an increasing number of visitors with big luggages hoarding space in its subways, on its buses and on the pavements.

"Hong Kong is basically losing market share" of the rich Chinese, said Ms Mariana Kou, an analyst at CLSA. Those are going to Japan, South Korea and Europe, while the tourists coming to Hong Kong now are spending less, she said.

While expenditure on luxury items fell last year, the sales of medicine, cosmetics and at supermarkets saw as much as a 9.3 per cent gain, government data shows. That's helping companies like YATA, an operator of seven department stores, which has seen Chinese tourists buy up the shampoo and groceries on its shelves, according to chief executive Daniel Chong.

The new shopping habits, though, are riling residents.

In Hong Kong's Yuen Long district, near China, there have been three protest marches in a month against the parallel traders and day visitors from the neighbouring Chinese city of Shenzhen.

The solution is to limit the number of visitors who are here for just a day, according to Mr Michael Tien, founder of clothing retailer G2000 Group. Those who come multiple times a year now make up 50 per cent of Chinese tourists, compared with 20 per cent five years ago, he said.

"Those visitors don't stay overnight and their contribution is very limited," Mr Tien said in an interview in Beijing where he was attending the legislature meeting as a Hong Kong delegate.

"I don't want mainlanders to see Hong Kong in a negative way, but I hope more people other than those from Shenzhen could visit Hong Kong."

The police charged 12 people out of 38 arrested during a March 1 demonstration, and used pepper spray to break up confrontations between the protesters and their opponents, the South China Morning Post reported on March 3.

Two-thirds of the 743 people surveyed last month wanted the government to reduce the number of individual Chinese visitors, the Chinese University of Hong Kong said on March 4. More than three-fifth of those polled said the tourists have brought inconvenience to their lives.

Premier Li Keqiang said yesterday in the nation's annual work report that China will strengthen cooperation with Hong Kong and will give full support to Mr Leung.