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Hong Kong, the end of business as usual?
Economy

Hong Kong, the end of business as usual?

Sunday, 07 June 2020
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Christophe Roulet
Editor-in-chief, HH Journal

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4 min read

Watchmakers face an increasing number of setbacks in Hong Kong. No longer the number-one export market for Swiss brands, this special administrative region is also at risk of losing its status as a major trade hub.

For almost a year, political unrest, combined with the global pandemic, have been gradually eroding Hong Kong’s attractiveness not only as a tourist destination but as a trade hub, too. As China locks horns with its special administrative region over legislation that will curb Hong Kong’s freedoms, protesters are again taking to the streets. The situation has also sparked international tensions, in particular with the United States, which lays responsibility for the coronavirus pandemic at China’s door, and more recently with the United Kingdom under Prime Minister Boris Johnson. None of which bodes well for Switzerland’s watch brands. “I don’t think the situation in Hong Kong could be any worse than it is today,” commented Jean-Daniel Pasche, President of the Federation of the Swiss Watch Industry.

Special status under threat

In the wake of last year’s turmoil, the Chinese Communist Party is pushing ahead with measures to introduce a law in Hong Kong that will criminalise acts that could threaten national security, decried as a fatal blow to the “one country, two systems” principle and in complete disregard for agreements made when Britain returned Hong Kong to Chinese sovereignty in 1997. “Similar concepts have been used to stifle the slightest democratic plea in China and to arrest dissidents and human rights lawyers,” explained Wilson Leung, co-founder of the Hong Kong Progressive Lawyers Group in an interview to Swiss daily Le Temps. “Beijing is preparing to do the same thing in Hong Kong and take full control at the risk of destroying the status of this international centre, with its hundreds of foreign chambers of commerce, companies and NGOs.”

China's economic growth has been carefully orchestrated to lessen Hong Kong's role.

In a context of strained relations between the United States and China, with the two countries continuing their standoff over trade, Donald Trump has clearly stated that he is prepared to impose economic sanctions on Hong Kong. Revocation of the region’s special trade status will have serious repercussions on its position as a financial and trade hub within the region. Boris Johnson responded to the planned national security legislation by pledging that the United Kingdom would allow almost three million Hong Kongers to live and work in the country, “which would place them on the route to citizenship”. These are, as yet, only warnings but should be taken seriously nonetheless. The Chinese Communist Party, meanwhile, has no intention of losing face by backing down, all the more so as China’s economic growth in recent years has been carefully orchestrated to lessen Hong Kong’s role as an economic and financial centre. In the early 1990s, 45% of Chinese exports transited via Hong Kong compared with 12% in 2019. Hong Kong’s contribution to China’s GDP has similarly decreased from 18% at the time of its handover to 4% today, according to World Bank figures.

Double whammy

The situation is a double whammy for watch brands. First of all, tourists have deserted the region. Still 65 million in 2018, of which 50 million Chinese, they generate annual revenues in excess of $40 billion for the city, 45% of which is spent on shopping. They’re now conspicuous by their absence. A survey by The Mercury Project reports a 65.8% drop in sell-out for watches and jewellery over the first four months of 2020. For retail overall, with sales falling by 35% over the same period, it’s become a matter of survival says the Hong Kong Retail Management Association.

Swiss watch brands route products destined for China via Hong Kong to avoid import duty.

The second question concerns Hong Kong as a trading hub. Around 90% of its exports are in fact re-exports, half of which go to China. This is precisely what happens when Swiss watch brands take advantage of free trade agreements to route products destined for China via Hong Kong, thereby avoiding import duty. Again, this comparative advantage is losing some of its shine. Under Xi Jinping, China has already slashed import duty on luxury goods to encourage domestic consumption, earmarked to drive the country’s growth. If, on top of this, Chinese interference means Hong Kong is ostracised by the international community, changes to how trade is conducted in the region seem inevitable. Virus or no virus.

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