Tightened policy on Chinese tourists worsened market pessimism in 2015

Added to unexpectedly worse 1Q15 sales decline.

Hong Kong finally tightened policy on Chinese tourists in response to mounting domestic concerns on capacity constraints.

According to a research note from UBS, effective mid-April 2015, the multiple permits, which granted Shenzhen residents an unlimited number of visits to HK since mid-09, are replaced by the 'once-a-week' permit.

The market viewed the move very negatively. This, plus the worse-than-expected sales decline in 1Q15, drove market expectations for an average 4-6%y/y contractions in retail sales this year.

A decline of such magnitude, happened last in 2003 on the SARS outbreak, is rather significant, said UBS.

While it believes the retail sector could remain in a doldrums for a while, a plunge in sales this year can probably be avoided.

The tightening in entry permission is in UBS' view modest. More importantly, local spending could pick up the slack this year.

Here's more from UBS:

So cyclically we think the market might be too pessimistic on the retail outlook in 2015.

We find it hard to envisage a 4-6%y/y contractions in retail sales, despite recent policy tightening, continued tensions between the residents and Chinese tourists and keen competition from other Asian destinations (Japan, Korea and Taiwan in particular) for Chinese tourists.

For sales growth to contract 4-6%, it could either entail an annual 20-30% drop in arrivals or a broad-based and significant contraction in local and visitor spending. A 20-30% drop in annual arrival is very drastic.

We did not see this kind of fall even in 2003 despite the disruption from SARS. A broad-based sales contraction is equally unlikely. Yes, visitor spending could contract, but the slack will mostly be offset by stronger local spending, in our view.