The challenge of parallel trading in HK

Nevertheless, Goldman Sachs expects Hong Kong to suffer a 5 percent reduction in tourist spending, while Credit Suisse has lowered the city's GDP growth forecast from 2.4 percent to 1.6 percent in 2015.

As day-trippers are estimated to account for 15 percent of retail spending in Hong Kong, their significant reductions could have an adverse impact on cosmetics, food and alcohol sales, as well as on malls and restaurants. In the first two months of the year, tourist arrivals from the mainland to Hong Kong soared 16 percent year-on-year, yet retail sales were up barely 2 percent from the previous year.

In effect, parallel trading may be a disguise for very different issues. After all, recent estimates suggest that up to 60 percent of parallel traders are in reality Hong Kong residents.

Moreover, Hong Kong's role as a "gateway" to the mainland is changing. In the past, it was the place to visit for the wealthy mainland residents who flocked to the city to purchase luxury items. That era is gone.

Last year, spending on luxury items plunged 14 percent. Today, wealthy mainland residents prefer Japan, the Republic of Korea and European countries, which actually compete for the visitors from the mainland.

As reforms accelerate on the mainland and free-trade zone policies proliferate across its megacities, the benefits of Hong Kong's role as a gateway city will diminish. Consequently, the city needs a strong leadership to communicate the vast benefits of visitors from and economic relations with the mainland.

What Hong Kong needs are policies to support its current level of productivity, growth and prosperity. It does not need self-induced economic challenges that risk dooming it to stagnation and irrelevance.

The author is research director of international business at the India China and America Institute (USA) and visiting fellow at Shanghai Institutes for International Studies (China) and the EU Centre (Singapore).