Will the trade war benefit HK tourism and retail?

October 18, 2018 / By  

Hong Kong is caught in the middle of escalating trade tensions between China and the US. However, there is early evidence to suggest that mainland Chinese tourists are increasingly avoiding the US as a destination, which could benefit Hong Kong’s tourism and retail markets.

On September 24, the US imposed a 10% tariff on USD 200 billion worth of Chinese goods, in addition to the tariffs on USD 50 billion worth of imports already enforced. This represents almost half of all Chinese goods exported to the US, with President Trump signaling that tariffs could be imposed on all goods eventually. China has retaliated with tariffs of its own, yet, it is unable to completely match the US as it imports far fewer goods than America does.

However, China has a trade deficit in services with the US of approximately USD 40 billion. Many have suggested that China could start to target these service sectors as a reciprocal measure to President Trump’s tariffs. Tourism is one such sector that could be pursued. The Chinese Government could interfere by both direct and indirect measures. One such direct response could be restricting tour operators from selling packages to the US, similar to what was imposed on tours to South Korea in 2017 after they deployed a new missile defense system. China’s response led to outbound tourist numbers to South Korea dropping by up to 40%. Negative reports in the state run media and travel warnings related to the US are indirect methods that China could also employ to reduce tourism to America.

Early evidence suggests that Chinese tourists are already starting to avoid the US. Flight booking website Skyscanner reported that bookings from China to the US had fallen by 42% during the “golden week” holiday period in 2018 compared with last year. While the strong USD is likely a contributing factor, the trade war should also be having an effect.

Hong Kong is well positioned to take advantage of any reduction in tourism to the US, as the city is the top destination for mainland Chinese tourists, accounting for 34% of all outbound trips. Assuming that Chinese tourist arrivals to the US does decline by 40% over the next 12 months, and Hong Kong captures 34% of those travelers, this would represent an additional 450,000 tourists arrivals . According to Nielsen, the average on-location spend for Chinese tourists in Hong Kong is USD 2,487 per visitor. Therefore, this increase in arrivals could translate to an additional USD 1.1 billion per year of spending on accommodation and retail in Hong Kong.

Figure 1. Top Destinations for Chinese Mainland Tourists
Source: Nielsen

Clearly both the retail and hotel sectors in Hong Kong will benefit from this influx of visitors. In addition, key infrastructure projects connecting Hong Kong to the mainland including the Express Rail Link and the Hong Kong-Zhuhai-Macau Bridge will further encourage Chinese tourists to come to the city. While the recent strengthening of the Hong Kong dollar against the renminbi may limit some of the uplift, early reports suggest that arrivals to Hong Kong during ‘golden week’ were well up on last year.

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