Hong Kong's economy has been changing fast in recent years. Industrial hollowing out is now history, but even the producer services industry, which has grown with cross-border demand, is losing momentum.

In opposition to the relocation and shrinking of the city's manufacturing industries and producer services in a losing competitive battle against cities and industries in the Pearl River Delta region, there has been an unexpectedly strong growth of consumer services in Hong Kong catering for the demand from mainland consumers in the PRD region and beyond.

In 2010, 22.7 million mainland tourists visited Hong Kong. It is difficult to estimate how much they spend in Hong Kong, but a local survey shows that each visitor last year on average spent HK$12,000 with about 60 percent of that on shopping. This will mean HK$163.44 billion, which amounted to half of the total retail sales in Hong Kong in the year (HK$324.94 billion). Without the contribution of mainland tourists to Hong Kong retail sales, it would only have been half of that. And it would mean a lot of retail businesses in the city would have to close down.

The advantages of Hong Kong for mainland visitors are obvious. There are institutional guarantees against fraud and fake products in Hong Kong; no place on the mainland can compete with Hong Kong on this ground. Hong Kong is an open city and a free trade port. There is almost no restriction against any goods imported from overseas. As a bridge of East meets West, mainland visitors in Hong Kong will be exposed to a much greater variety of consumer goods than in any mainland city.

Most importantly, Hong Kong has a low tax regime with no sales tax, no value-added tax, no export tax and very few import duties. Any consumer goods sold in Hong Kong will be cheaper than on the mainland, which with all the taxes and duties added together will add another 20-30 percent to the cost and are thus substantially more expensive. With the appreciation of the yuan and the central government supporting income growth, mainland visitors will enjoy steadily increasing purchasing power when they come to Hong Kong.

All these advantages combined together have put Hong Kong in a unique position to capture the huge mainland consumer demand that has been increasing at double-digit growth rates and with few competitors in the world. The volume of retail sales to be expected in future years will not be just HK$164 billion or 50 percent of local sales; double-digit growth will surely push the volume to beyond HK$200 billion and even HK$300 billion. It will probably only be even faster if the central government further liberalizes existing restrictions that are holding back the increase in the number of visitors to Hong Kong.

One thing that is definitely certain in the coming years is that consumer demand from mainland visitors will contribute more than half of local retail sales. Hong Kong is becoming the emporium of China and the world shopping center for the well-off Chinese consumers that are numbered in the tens to hundreds of millions.

The transformation will not return Hong Kong to its entrepot role of the pre-1949 period. The retail explosion is a new development and a radical restructuring of the local economy. It is going to enhance the local competition by drawing demand to Hong Kong, not like the previous moves in the industrial processing trade and producer services that only serve to hollow out the local economy.

The author is head of China Business Centre, Hong Kong Polytechnic University.

(HK Edition 06/17/2011 page3)