VOICES FROM CHINA - 34th Hong Kong Watch & Clock Fair: What are the real reasons for the crisis?

November 2015

Enders Lam, vice-president of the Hong Kong Watch & Clock Fair and of the Hong Kong Watch Manufacturers’ Association, points us towards the real reasons for the fall in luxury watch sales in Hong Kong and, by extension, China.

Nine out of ten watch buyers in Hong Kong come from mainland China. But people are saying that the number of Chinese tourists has fallen by 50% in the first quarter of 2015! Can you confirm this figure?

I know that sales of watches over 100,000 Hong Kong dollars (approx. CHF 12,000) have fallen dramatically and, consequently, the drop in numbers of Chinese tourists could very well be greater than 50%...

Are the Chinese no longer interested in buying watches in Hong Kong?

As you know, China has introduced anti-corruption measures that have cracked down on the purchase of luxury goods, particularly watches, intended as ‘gifts’. And the Chinese mainly buy watches to give as gifts. What type of gifts they might be, I couldn’t possibly tell you. What is beyond question, however, is that this policy has given Chinese buyers cold feet.

But the anti-corruption policy was already in effect last year! Also, as I’m sure you know, new laws in China tend to be applied strictly at first, then gradually things start to relax.

Yes, in the beginning what we saw was a ‘wait and see’ attitude. But the government stood behind its policy and continued to follow through, and people eventually started to believe they meant it. It wasn’t just political grandstanding by the new president, and the Chinese people understood this. The policy was fully implemented finally in 2015.

But isn’t the economic slowdown in China the main reason?

I think the anti-corruption policy is the key factor. The slowdown in the Chinese economy plays a part, certainly, but to a lesser extent. The other major reason is that the Chinese are now allowed to travel to Europe – where the euro has fallen 20% and they can claim back VAT – as well as Japan, Singapore and the United States, which has just announced tourist visas with a 10-year validity! The bureaucratic obstacles are gone, and the Chinese can now travel anywhere. In short, the sales that Hong Kong has lost out on have been picked up by other markets. You should understand, for the longest time Hong Kong was the only foreign destination that Chinese were really allowed to visit. That is no longer the case today.

You forgot to mention the free trade agreement between Switzerland and China, which has equalised the retail price of watches sold in Hong Kong and on the mainland, hasn’t it?

Yes, in theory. But in practice, Hong Kong remains one big duty-free zone. China still has import taxes of 12%, VAT at 17%, and a ‘Luxury Goods Tax’ on luxury items. A watch priced at USD 10,000 will still be at least 30% cheaper here than in China. Because of this price difference Chinese visitors continue to treat themselves to jewellery, imported foodstuffs such as powdered baby milk, nice hotels, etc. That’s how it works in reality.

Some brands and multi-brand shops see things differently. They display the same watches at the same price because, as you have omitted to mention, shop space in Hong Kong is horrendously expensive per square metre!

Brands like Rolex effectively set a sort of international price, and don’t worry about rent differences. China, however, operates with fixed prices, plus taxes, except in certain areas such as the island of Hainan. But this applies only to items priced up to 5000 yuan (approx. CHF 700). What is more, the price of rent and office space has come down significantly in Hong Kong.

The Beijing government has apparently discouraged its citizens from visiting Hong Kong since the Umbrella Revolution, a prodemocracy student demonstration that took place in Hong Kong. It’s a kind of punishment, isn’t it?

During the social uprising, and for a few months afterwards, Chinese civil servants were indeed denied visas to travel to Hong Kong, except in urgent cases. It’s true that the demonstration had an impact on the number of tourists, who probably stayed away out of fear. Nevertheless, it also attracted a fair number of Chinese who were curious to witness a major popular protest. And I can assure you, as I saw myself in the Central and Mongkok districts, the umbrella revolution was incredibly peaceful!

Source: Europa Star November 2015 Magazine Issue