For years, companies selling luxury goods have counted on China for growth. They relied on Chinese consumers for a third of their global sales. But the momentum appears to be slowing as some in the middle class cut back to cope with swelling bills and shrinking wealth. The cash drain facing households like is prompting economists to warn of a further slide in spending, as luxuries and high-value items are an early indicator of consumer caution when a country faces a shaky economic future.
Hong Kong, where mainland shoppers converge in search of duty-free luxury goods, is also feeling the heat. The year-on-year sales growth for jewelry, watches and clocks, and valuable gifts slowed to 2.2% in September from 20.8% in the previous month, the statistics department announced last week.
“We have seen that Chinese consumer confidence is off the peak,” said Luca Solca of Exane BNP Paribas, in an email to the Nikkei Asian Review. “If the downward trend continues — and it could be exacerbated by the international trade tensions — then we may see luxury spend growth fading as a consequence.”
In the past decade, Chinese have been among the biggest customers for luxury brands. The sector took a major hit from President Xi Jinping’s anti-corruption campaign in 2012, but started seeing a strong recovery in late 2016. Sales surged around 20% on the year in 2017, to 142 billion yuan ($20.4 billion).
But that recovery is losing steam as sales of big-ticket items fall. Auto sales in China tumbled 11.6% in September, marking the third straight month of contraction. September’s decline was also the biggest monthly fall in more than six years.
LVMH, the world’s largest purveyor of luxury goods, said in October that sales growth of its Louis Vuitton products in China fell from the high teens to the midteens in the third-quarter from a year ago. Ermenegildo Zegna Group recently told Bloomberg that it will open fewer stores in China next year after observing weaker demand over the past few months.
Analysts said that the purchasing power of China’s middle class over the years has been backed by investment gains on paper and easy credit, as opposed to genuine income growth. “The stock market is bad right now and the property market is frozen,” said Liao Qun, chief economist at China Citic Bank International. “It has become harder for people to cash out.”
About 95% of middle-class families own property, and they spend an average of 26.6% of their monthly income on financial investments and insurance, higher than the savings they put aside, according to a survey conducted by the Hong Kong Trade Development Council last year.
But this year, property and stock investments have become less reliable income generators. The Shanghai Composite Index lost almost 30% of its value since hitting a high in January, and the country’s largest developers are slashing prices for some new apartments to speed up sales, offering discounts of as much as 30%.
At the same time, Beijing’s crackdown on internet-based lending platforms also cut off the easy credit lines that many young Chinese relied on to buy luxury goods, cars and electronics, according to Andy Xie, an independent economist in Shanghai and former head of the Asia-Pacific economics team at investment bank Morgan Stanley.”The bubbles will burst,” he said.
Weak consumer confidence will put a brake on Beijing’s drive to stimulate the economy through consumption when two other pillar industries — exports and manufacturing — are under greater pressure due to the trade war with the U.S.
China’s State Council recently issued a document laying out goals including expanding the size of the middle-income group and nurturing high-end consumption. The aim of it was clearly to stimulate spending, but the document fell short of detailing how the goals would be achieved.
Beijing has also tried to encourage spending at home by cracking down on overseas expenditure. Tighter border checks on undeclared luxury goods have been in place since October, according to industry insiders. Ostensibly, this measure is to rein in daigou — a practice of buying tax-free goods overseas and reselling them domestically at a profit, said Mariana Kou, a Hong Kong-based analyst at investment group CLSA. But it will also have an impact on big-spending travelers.
In 2017, mainland Chinese spent over $115 billion during more than 130 million overseas trips. About 75% of luxury consumption by Chinese nationals occurred outside the country, according to estimates by management consultancy Bain & Company.
More from NEWS
In an attempt to boost Prada's creative stance, Creative Director and Co-owner Miuccia Prada has delivered her first collection co-authored …
Homegrown L.A. rock ‘n’ roll brand Amiri has opened on Rodeo Drive its first retail store. “It was really important that …
The Beaumont has announced that it remains closed and takes advantage of the challenging times to start work on some long-planned …