A friend of mine here in Hong Kong works as the local finance director for a French designer shoemaker -- the one with the red soles. You know who I mean.
He is expecting an interesting conference call this week with Paris headquarters about how the luxury goods company is going to handle the downturn in China. There aren't many options, my friend says. Either he makes up some good-looking numbers and loses his job in about a month when he gets found out, or they're going to need to close stores. A lot of stores.
It now has been a full year of pain for Hong Kong retailers. Figures on Monday show that sales plunged 21.4% in January compared with the like month in 2019. The new numbers mark 12 straight months of decline.
Shoppers are steering clear of anywhere but the grocery chains and drugstores. An industry hampered by last year's pro-democracy demonstrations has been hit even harder by the coronavirus scare.
The figures show that Hong Kong's economy was not in good shape even before the demonstrations started in earnest last summer. By the time of the million-person march in June, sales had already turned south for a good six months.
But street protests and an anti-mainland China sentiment doubled down on the downturn. August sales fell 22.9%, and the readout has been just about as pessimistic every month since.
The Lunar New Year fell in January this year, whereas it was in February in 2019. So January 2020 should have shown a stronger print than the same time last year. Instead, the downturn once again has intensified after things looked to be turning around ever so slightly at year-end. The holiday season brought a tentative truce between protestors and police.
Supermarkets are the only shopkeepers loving life. Sales were up 10.2% this January as Hong Kongers hunkered down at home. Whatever socializing they did, they did with family and close friends. Sales of fresh fruit, vegetables and meat are also up, as are sales of fuel.
But every other category of retail is in significant decline. Life is particularly punishing for luxury goods, as my finance friend is finding out. The take at jewelry and watch merchants is down a shocking 41.6% compared with a year ago. These are the stores that normally attract scores of mainland shoppers, who come to Hong Kong certain that what they're buying here is the real deal, not a counterfeit knockoff. Clothing stores have seen sales slump 28.9%.
Hong Kong's retail rents are some of the highest in the world, but landlords have yet to offer much in the way of concessions. My finance director friend characterizes them as unrealistic money grubbers who can't see the big picture for the short-term profits. They seem eager to eke out an extra month or two of high rents and then suffer store closures than to strike a reasonable deal to keep shops open at more reasonable rents.
In its budget last week, the Hong Kong government has promised each permanent resident of the city HK$10,000 (US$1,283). It hopes citizens will take that money to the stores. To help employers, it is offering low-interest loans of up to HK$2 million (US$257,000), with a 100% government guarantee. It will also waive rates for the year ahead and the profits tax for last year, up to a cap in each case. While welcome breaks, these piecemeal efforts are unlikely to have much of a long-lasting effect.
Hong Kong stocks rose on Monday, up 0.6%, ahead of the release of the data. They're down 9.5% since the extent of the Covid-19 outbreak became clear in mid-January. Sentiment is very dreary. One of the few pluses is that everyone has been expecting a shocking economic performance due to the protests. Now, with the virus, surely it can't get a lot worse.
Investors are clinging to hopes that the local government, and more particularly that on the mainland, will deliver stimulus to give a steroid injection to the economy. After figures in China over the weekend showed that mainland manufacturing fell for February to its lowest-ever level, it's not at all clear that the Hong Kong or Beijing governments have the wherewithal to get growth back into positive territory.