At the time of writing – in late October – Hong Kong has reverted to Chinese sovereignty for more than 18 years (and counting). All the same, Queen Elizabeth II, the British monarch, still appears to reign supreme in the special administrative region. But surely, my dear readers, you know that this scribbler is jesting. What I wanted to say, in all earnestness and with grave concern, is that a phrase used by Her Majesty in 1992 to describe her personal and family plights, is arguably applicable to Hong Kong; and that is annus horribilus or, in plain English, ‘horrible year’. This is no truer than in retail trade, of which jewellery, the wares plied by practitioners in our industry, is part and parcel.
Bleak it is indeed
One would do well, however, to let the facts speak for themselves. As this goes to press, relevant data are available at most up to and including August. They make for some very dismal reading indeed. On a three-month-moving-average basis (to iron out some of the seasonal and extraneous volatilities), the retail sales value of jewellery, watches and clocks as well as expensive gifts had declined year-on-year for 17 months in a row; that is to say, uninterruptedly since March 2014. In 2015 to date, jewellery sales in money terms fell 13.7 percent from an already weak comparison base of the first eight months of 2014, during which they had tumbled 16.2 percent. The trend for sales in volume terms was equally bleak, with a year-to-date decline of 10.7 percent on the heels of a 14.2-percent slump in the corresponding 2014 period. On a 12-month-running-total basis, sales – both in value and real terms – had shrunk from a year earlier since June 2014.
If domestic jewellery sales make for a distressing sight – retail jewellers have been heard as saying that conditions have not been as bad since 2003, when the special acute respiratory syndrome rode roughshod over the territory – how goes exports, the sale of our products abroad? The answer is that they too have been uninspiring, even if seemingly less so. Still, in three-month-moving-average terms, domestic exports had shrunk, as of this writing, since June 2013. Domestic exports now account for 10 percent or less of total exports. Had it not been for the comparatively stronger but noticeably erratic performance of re-exports, total jewellery exports would have fallen more than 1.7 percent year-on-year in the first eight months of this year, comprising a 6.9-percent decrease in domestic exports and a 0.9-percent easing in re-exports. On a 12-month-running-total basis, overall exports had contracted from a year earlier since June 2014.
Will they come? Or won’t they?
Such dispiriting export data reflects predominantly the new, weaker normal of the global economy in the wake of the financial tsunami that erupted in the United States in the first place and, before long, engulfed the developed world and, to a lesser extent, emerging economies. Meanwhile, the poor state of domestic jewellery sales owes in significant measure to the continuing downturn of tourism in Hong Kong, foremost where visitors from north of the border are concerned, as they dominate by the sheer law of numbers, typically accounting for some 90 percent of total arrivals. In the eight months to August, overall tourist arrivals eased off 0.1 percent, while those hailing from the Mainland edged 0.8 percent higher. While the Mainland arrivals seem to be holding up, if only barely, one hastens to note that in four of the last months for which data is available, year-on-year comparisons have been firmly negative. As well, the 12 months to date total grew just 5.8 percent; that was the smallest increase since November 2009.
Visitor arrivals from mainland China, as elsewhere, are affected above all by the performance of and prospects for the macro economy. For as long as one can see, however, not much hope can be pinned on a cyclical upturn of China’s economy. This is because the second-largest (by some criteria, largest) economy in the world is in the thick of economic rebalancing as the authorities strive to shift economic impetus from manufacturing exports and capital outlays to residential investment and domestic consumption of goods and, especially, services.
But one remains hopeful – and with good reason – for the longer haul. This writer, for one, does not view China as prone to be snared by the so-called middle-income trap. Nor is it likely to fall prey to secular stagnation, which is now a major risk scenario for developed nations, not least the United States. Increased but targeted fiscal activism plus similarly carefully administered monetary relief and, one hastens to add, deepening and widening structural reforms should see the economy in the pink again after an indefinite period of transitional throes. Some comfort can also be gleaned from the prospect that the peak of the official austerity campaign is conceivably behind us, which means that for each level of disposable income, mainlanders' propensity to spend would increase or at least stop declining.
What is cause for concern - and increasingly so - is that Hong Kong's international competitiveness and attractiveness in the eyes of tourists is being eroded by the day. First, the local unit is linked to the US dollar which is the de facto emerging currency of recent years. Second, local wages are soaring and commercial rental, while possibly peaking, remains lofty by almost any standard, thus augmenting the costs of doing business in the territory. Third – and this is most disconcerting – animosity towards parallel traders to and from mainland China appears to be spreading and intensifying into antipathy towards mainland-sourced visitors as a whole. To date, attacks on mainlanders emanate from an apparently tiny fraction of the local populace. But it is the trend that gives one pause and that must be stopped in its tracks.
America – Oasis of prosperity?
While an imminent crash of the Chinese economy is not on the cards, it cannot be gainsaid that its golden era of double-digit growth rates are behind us. Going forward, real GDP growth rates of five to seven percent will likely become the new normal for the motherland. Those outcomes pale beside its stellar performance in years past but will still register as among the fastest comparable results in the world. As China goes, so goes the United States. Its growth trajectory after the 2008-09 financial crisis has been at least somewhat disappointing as results have been distinctly lacklustre and below potential. Yet America's is still the economy that has set the pace for the developed world. As well, it has recovered all the ground lost – and then more – faster and farther than its advanced industrialised peers.
As a market, therefore, the United States has tarnished but still significant potential, for in a reverse beauty contest, it is the least ugly that would be crowned queen. It is gratifying, therefore, that in the first eight months of 2015, total jewellery exports from Hong Kong to America leapt 11.8 percent from the same period in 2014. It should be noted, however, the year-ago period, which saw exports fall 2.7 percent, constituted a weak comparison base from which gains could easily be exaggerated. Further, within the 2015 outcome, domestic exports have actually slumped 8.6 percent. It is only by virtue of a 14.9-percent upsurge in re-exports that the total figure has been flattered; and it is a well-known fact that Hong Kong's value-added in re-exports is none too significant.
Thus, we must spare greater effort to make inroads into the US market. Meanwhile, it is important to remember that the American economy is not without potential risks and hazards going forward. For one thing, the greenback could become unduly strong, undermining US exports, as the Federal Reserve will, in all likelihood, be the first major Western central bank to hike interest rates. But shackled by its US-dollar link, Hong Kong's exports – jewellery included – will not reap any benefits from a strong American unit. Second, as US rates increase and depending on the timing and circumstances under which this transpires, there could be repercussions around the world, especially for emerging markets, whose potential as markets for our jewellery shipments abroad in the medium-to-long term cannot be underestimated. Further, given that this is, in verity, a globalised world, possible – even probable – storms in emerging markets and elsewhere in the world could ricochet and adversely affect the prospects for the American economy.
Diversify, diversify
The foregoing is as far as the United States and China, the two largest economies in the world, are concerned. Elsewhere, in Europe, quantitative easing a la European Central Bank appears to be having some initial favourable impact on the Continent's economy. Still, it is taking longer than expected and growth projections have most recently been revised downwards – again! The same comment applies to Japan, where the most critical missing link is rising wage rates and household consumption amidst mild but stubborn deflation. In addition, structural reforms requisite for higher potential growth further down the road still appear to be proceeding slower than anticipated.
Against this background, there is a need – arguably more urgent than ever – for Hong Kong's jewellers to diversify in terms of export markets. Some of the recent rising stars – such as India, Indonesia, Mexico and Turkey – immediately come to mind. We also need to diversify the sources of our visitor arrivals. In the light of the law of numbers, the significance of tourists from mainland China, who tend to be jewellery buffs, cannot be downplayed. But there is also a need for us to join hands with the rest of the tourist and retail industries to bring in higher-end visitors who are here for conferences and conventions and whose consumption budgets and buying propensities are flusher than the man in the street as they combine business with pleasure. But these practitioners in the local jewellery industry cannot deliver by themselves. A concerted effort is in order, based on the principle of one for all and all for one. Amen. (Photo courtesy: SIA)
By Peter Ip
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