Cheap Chinese Goods are
Becoming a Costly Problem. Exhibit A: Hong Kong
Shoppers are hopping across
the border after a prolonged decline in prices
Prices
are falling in mainland China. That’s a boon for people living in Hong Kong, but
a big problem for the city’s businesses.
Consumer
prices in China fell 0.8% in January compared with a year earlier, the country’s
biggest deflation reading in more than a decade. That is a sign of the tepid state
of the world’s second-largest economy, where a sputtering recovery has knocked confidence
and encouraged Beijing to censor some economic research.
Hong
Kong residents are increasingly hopping across the border to the city of Shenzhen,
where they load up on frozen food and cheap furniture at big-box stores like Costco
and Sam’s Club. Hong Kong business owners, unable to compete with their Chinese
counterparts on price, are feeling the squeeze.
“Walking
on the streets these days, you’ll feel that Hong Kong retailers are in big trouble,”
said the city’s former financial secretary, John Tsang, in a recent social-media
post.
The
pain being felt by businesses in Hong Kong offers a partial answer to a question
that has been debated by economists for much of the past year: How will deflation
in China impact the rest of the world?
Chinese
export prices have dropped steadily since late 2022 and were 8.4% lower in December
than they were a year earlier, according to customs data. Economists think that’s
probably a good thing for Europe and the U.S., where central banks have been forced
to embark on an aggressive series of interest-rate increases to keep rising prices
in check. But the impact on smaller countries could be more troublesome.
China
is the biggest trading partner for multiple countries across the world, and is particularly
influential for countries in Asia. The risk for these countries is that Chinese
companies dump their goods overseas in response to weak demand at home. They can
also undercut manufacturers in countries like Vietnam and Malaysia, which have slowly
been muscling in on China’s status as the world’s factory.
“This
Hong Kong story is applicable to countries that are near the neighborhood of China because the supply chain is much smaller,”
said William Lee, chief economist at the Milken Institute, an economic think tank.
The shorter supply chain for China’s trade with its neighbors
means changes in price pass through more directly, rather than being swallowed up
by the various companies that get involved in shipping goods over longer distances.
China’s
neighbors in East Asia don’t have the option to impose
protectionist policies against it, analysts at Citigroup wrote in a January note.
China is simply too big a force in global trade for them to risk its ire.
But
if it is hard for China’s neighbors to push back against
falling prices, it is even tougher for Hong Kong—which is run by a pro-Beijing government
that wants closer integration with the superpower next door.
Hong
Kong residents are partly benefiting from the strength of the U.S. dollar. The Hong
Kong dollar is pegged to the U.S. dollar, and the city’s de facto central bank has
copied the Federal Reserve’s historic series of interest-rate increases over the
past two years. China’s central bank has gone in the opposite direction, cutting
rates in an attempt to boost the moribund economy.
Since
the end of 2021, the Chinese yuan has lost more than 11% of its value against the
Hong Kong dollar.
Counting
the cost
Hong
Kong’s economy grew 3.2% last year, clawing back some lost ground after a 3.7% contraction
in 2022. But the numbers mask a host of difficult problems, including an exit
of foreign businesses, a prolonged slump in the real-estate sector and the
lowest fertility rate in the world.
The
apparent embrace of what mainland China had to offer would have appeared unthinkable
five years ago, when the city was swept up in massive antigovernment
protests. Back then, shoppers and diners looked up color-coded maps to help them
identify businesses that shared their political stance to patronize—and avoided
those perceived as having links to mainland China.
But
years spent cooped up in Hong Kong during the pandemic and penny-pinching by anxious
residents has helped boost Shenzhen’s appeal.
“We’re
seeing a readjustment of our way of life that suggests economic interdependency
between Hong Kong and Shenzhen,” said Edmund Cheng, a political sociology professor
at the City University of Hong Kong.
Last
year, Hong Kong residents made more than 50 million trips up north following the
lifting of all pandemic-related travel restrictions in February, according to Hong
Kong Immigration Department data. That’s still below prepandemic
levels, but their spending power helped boost retail sales in Shenzhen, which rose
by 7.8% in 2023, recording one of the biggest jumps at any mainland city last year.
In
a survey by a business lobby last year, just 37% of Hong Kong businesses said they
expected revenue to grow in 2024. Less than a third thought they were on track to
beat prepandemic levels.
Korsy Lee, 39, is one of many Hong Kong residents
who make a regular pilgrimage to Shenzhen—and earns a profit from it. He began shuttling
goods back from Shenzhen last August as a side hustle, and now goes there four times
a week, loading up his Toyota minivan with frozen hamburgers, fish maw soup, Panasonic
dishwashing machines and even toilet-paper rolls. He takes orders from customers
and charges a flat fee.
“Eighty
percent of my customers are housewives who want to make every penny count,” he said.