China Sees Higher Quality at Lower Prices in H.K.

By Michelle Yun - Oct 10, 2011 9:53 AM GMT+0700

Pan Jingdan traveled more than 40 miles to shop in Hong Kong during China’s Golden Week holiday. Unlike the thousands of Chinese tourists who lined up outside luxury goods stores, she stuffed her bags with shampoo, cosmetics and Unilever’s Dove shower gel.

“It’s so much cheaper here, especially if you buy at the local pharmacies,” said Pan, a 23-year-old property agent from the southern Chinese city of Dongguan who regularly visits Hong Kong’s Sheung Shui district. “The quality is also better. China is a country full of fakes.”

Hong Kong retail sales, boosted by mainland Chinese tourists, surged 26 percent to HK$264 billion ($34 billion) in the eight months through August. Visitors from the mainland, whose spending power has been boosted by the yuan’s climb, account for 67 percent of the city’s tourists and are also the biggest group of spenders, James Tien, chairman of the Hong Kong Tourism Board, said Oct. 7.

“Mainland Chinese would also stock up on lower-value items like toothpaste and shampoo, because just like luxury products, they’re significantly cheaper in Hong Kong,” Matthew Marsden, director of consumer and retail research at Daiwa Capital Markets, said in an interview. “They’re also more assured of quality and authenticity when they shop here.”

Sales for Hong Kong’s merchants may grow 15 percent to 20 percent during China’s weeklong holiday that began Oct. 1, compared with the same period last year, said Caroline Mak, chairman of the Hong Kong Retail Management Association.

Cheaper Chanel

“Even if there’s a hold back, there will still be healthy growth,” Raymond Yeung, a senior economist at Australia & New Zealand Banking Group Ltd., said in an interview. He also predicted sales growth of about 20 percent during Golden Week.

Hong Kong’s economy in the second quarter shrank 0.5 percent from the previous three-month period as export growth slowed. Morgan Stanley and Daiwa Capital Markets say gross domestic product may also have contracted in the third quarter, meeting the technical definition of a recession.

Zhang Zuoru said it was worth waiting in line in the Tsim Sha Tsui tourist district of the former British colony. She bought a bag in the Chanel store on Canton Road for 33,000 yuan ($5,190), at least 20 percent less than she would pay in mainland China, she said.

“I go to Beijing often -- there are no lines there but it’s very expensive,” said Zhang, 23, who traveled more than a thousand miles from Inner Mongolia with her parents.

Biggest Spenders

The yuan has gained more than 7 percent since June 2010, when China ended a two-year peg to the dollar. Hong Kong’s currency is pegged to the dollar and the city doesn’t impose taxes on luxury goods, while mainland China does.

China’s growth is slowing after the central bank raised interest rates and as the government cools the property market to reduce the risk of a bubble. The expansion was 9.5 percent in the second quarter of this year, compared with 10.3 percent in the same period in 2010.

Still, China’s growth remains the fastest of any major economy. Chinese tourists are the biggest shoppers in Hong Kong, spending an average of HK$7,800 a trip, according to Tien of the tourism board.

The currency’s advance also benefits Belinda Hong, a 25 year-old housewife who lives in Shenzhen, which adjoins Hong Kong and was China’s first special economic zone.

Medicine, Hair Dye

“I feel more assured about products here,” Hong said, standing with a group of friends, each with a rolling suitcase in tow. She bought cosmetics, milk powder, chocolate and biscuits.

Chen Chao, 34, traveled more than 60 miles from Guangzhou to buy medicine and hair dye in Mong Kok, north of Tsim Sha Tsui. Similar products over the border can cost 20 percent more and are of inferior quality, said Chao, who added he may also visit a Louis Vuitton store.

Chinese visiting Hong Kong to buy luxury goods can also purchase daily necessities “to use up spare luggage capacity in their new Samsonite suitcases,” Daiwa’s Marsden said.

Samsonite International SA raised $1.25 billion in an initial public offering in Hong Kong this year, joining companies such as L’Occitane International SA in taking advantage of growth in China, where rising affluence is bolstering spending on foreign products.

Jewelry Sales

Chow Sang Sang Holdings International Ltd. (116), the biggest Hong Kong-listed jewelry maker and retailer, said revenue in the first six days of Golden week rose more than 50 percent.

Wellcome, the grocery chain run by Hong Kong’s second- biggest retailer Dairy Farm International Holdings Ltd. (DFI), had “satisfactory growth” during this year’s Golden Week, according to an e-mailed statement. Mainland Chinese shopping at its stores bought shampoo, toothpaste, medicine, chocolate and cookies, it said.

The number of visitors from China to Hong Kong for the first five days of Golden Week rose 13 percent from a year earlier, Tien said. Hong Kong received an average of 117,008 daily arrivals from mainland China from Oct. 1 to Oct. 6, according to government data.

Visitors accounted for 34 percent of retail sales in Hong Kong last year, with mainland Chinese comprising 76 percent of tourist spending, ANZ’s Yeung estimated.

Apple Laptops

Shoppers from China also come to Hong Kong for better deals on products from Apple Inc. (AAPL), which opened its first store in the city last month. “We’re buying three laptops to bring home,” Kang Qunxia, 25, said, sitting at the bottom of the store’s spiral staircase with three Louis Vuitton shopping bags at her feet. She was waiting for her fiance who was perusing computers on the floor above.

“We were planning to spend about 60,000 to 70,000 yuan this trip and we’ve already spent 30,000 this morning and probably another 30,000 here,” Kang said.

Mainland Chinese need to get permits to visit Hong Kong as well as endorsements from public security officials, according to the Hong Kong Immigration Department website.

The tourism board is expecting 10 percent more visitors during Golden Week from a year earlier compared with its initial forecast of 8 percent, Tien said. “Tourism was up 16 percent for the first nine months of the year, but our forecast had to take into account the market environment.”

The last day of Golden Week this year falls on a Friday, which may boost retailers’ sales, Tien said. “Usually they all leave by the last day. But this year, the last day is on a Friday, which means many may stay through the weekend.”

To contact the reporter on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net