News that China is cutting taxes on imported goods may negatively impact Hong Kong's retail sector by reducing demand from mainland visitors.
The Chinese government has announced that, from June 1, import taxes on a range of consumer goods, including clothing, shoes, healthcare, beauty and baby foods, will be cut significantly.
For example, import taxes on clothing will be cut from 14-23% to 7-10%, and import taxes on skincare goods will be cut from 5% to 2%.
This is a welcome move for China's economy, since it shows that the government is taking steps to both phase out its outdated import-substituting tax policy and boost domestic consumption.
However, for Hong Kong retailers the news is hardly positive. Countless traders in the city state rely on mainland visitors for sales and indirectly benefit from the mainland's previous tax policy.
The news comes hard on the heels of recent data releases that have shown a drastic slowdown in the number of mainland visitors coming to Hong Kong and a steady drop in retail sales, which is a mainstay of the Hong Kong economy.
Does this mark the end of the Hong Kong retail sector? Most likely not. The city remains a tourist hotspot and still attracts a significant number of tourists from both the mainland and around the world. Also, mainland tourists flock to Hong Kong to buy goods not just because of price but also because of quality, reflecting the ubiquity of fake goods on the mainland.
There will be some negative effects though. Landlords used to charging the world's highest retail rent prices may suffer as occupants look to renegotiate terms. Also, employment may be hit as trading conditions weaken.
That said, this is something Hong Kong, and the world, will have to get used to. As China reforms, the structures previously underpinning regional economic growth will evolve, with negative impacts on the way. We are seeing this already in weaker trade growth in the Asia Pacific region as China relies more on domestic production and reduces its imports from local clients. The Hong Kong case is no different. The question for Hong Kpng's leaders now is how they deal with it. Let's hope for Hong Kong people's sake, they have an answer.