Chinese tourist arrivals up 6.1% after 18 months of decline

It was reflected in the improved retail sales as well.

Retail sales fell 8.1%yoy by value and fell 7.1%yoy by volume in 2016, according to Citi.

The continuation of a sharper fall in volume than value indicates that retailers continue to use price discounts to attract sales. Nonetheless, the negative margin of retailers have alleviated from -2.1ppt in 2015 to -1.1ppt in 2016, suggesting retailers have adapted to this low sales environment, especially for the luxury end.

On a seasonal adjusted basis, retail sales value and volume have both increased by 2.3% and 2.7%, respectively, in 4Q16 over the previous quarter. Although retail sales by value have remained in negative growth for 22 consecutive months, the latest release showed a narrower decline with Dec retail sales having fallen -2.9%yoy by value.

Here's more from Citi:

Luxury goods sales and cosmetics benefited from recovering tourist trend: Value sales of jewellery, watches and clocks and valuable gifts rose by 2.3%yoy in Dec – this is a meaningful positive print after 26 months of negative (ignoring the zero growth noted in Oct16).

This is in line with the improvement in Mainland Chinese tourist arrivals – which also have returned to positive growth of 6.1%yoy after 18 consecutive months of decline.

Similarly, medicines and cosmetics – which are additional top shopping list items for Mainland tourists – saw sales value rebounded to +4%yoy in Dec.

Selective consumption by locals expected to continue: Recovering consumer confidence in 2H16 and average wage growth of 3.8%yoy in 1Q-3Q16 appear to support steady local consumption. However, big ticket item purchases remain lackluster, as sales of motor cars, consumer durable goods and other consumer durables are still negative.

We expect further mild improvements near term: We see retail sales likely improve on less unfavourable base effects, an earlier Chinese New Year holiday (in Jan17 vs. Feb16), and signs of Mainland tourist arrival recovery.

Overall, we think HK remains an attractive visiting destination for Mainland Chinese especially during festive seasons – therefore Jan17 sales may be good as more Mainland tourists visit HK during the CNY holiday. To a certain extent, there may also be some diverting effects as it is easier for Mainland tourists to travel to HK rather than Taiwan (given group tour visa restrictions).

Having said that, we caution that the purchasing power of Mainland tourists remains at risk if the RMB depreciation picks up pace again on the back of a strong USD.

The unemployment rate of the consumption- and tourism-related segment went down by 0.3ppt to 4.9% in Oct-Dec16, but was still higher than the overall unemployment of 3.3%.