News / Economy

China Luxury Struts Despite Graft Crackdown, Slowing Economy

China's Luxury Sales Surge Amid Graft Crackdown, Slowing Economyi
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September 24, 2013
China is cracking down on government excess and corruption. Advertisements for luxury goods are banned and it’s riskier than ever for officials to flaunt their wealth. Even with the official focus on austerity and China’s slowing economy, however, Chinese demand for luxury goods continues.
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William Ide
— China is cracking down on government excess and corruption. Advertisements for luxury goods are banned and it’s riskier than ever for officials to flaunt their wealth. But even with the official focus on austerity and China’s slowing economy, Chinese demand for luxury goods continues.

In the rich port city of Shanghai luxury shops are like convenience stores, there is one on almost every corner.  China is the world’s second largest market for luxury brands.  By 2015, McKinsey and Company estimates the country will account for more than 20 percent of the global luxury market.

Luxury industry analyst Pablo Mauron said that despite the challenges, he is still upbeat about the future.

Mauron, who is the general manager China of the Digital Luxury Group said that while there are some signals of slowing, overall luxury brands remain confident about China.

“They keep investing massively in China, opening new stores. In Shanghai, we have new malls, new luxury malls opening every month almost,” Mauron said.

After years of breakneck expansion, China’s economic growth is hovering around 7.5 percent.  While that’s not bad and a level many countries would envy, it’s a sharp change in China after years of annual growth around and above 10 percent.

'Brother watch' effect

Embarrassed by corruption scandals that have highlighted the privilege of China’s ruling Communist Party elite, the government has banned lavish banquets, gift giving and ostentatious displays of wealth.

Yang Dacai - the former Chinese official who also is known as “brother watch” - was sentenced to 14 years in prison earlier this month. Yang’s corruption was exposed when a blogger noticed that he frequently wore expensive luxury watches and asked how he could afford the flashy timepieces on a civil servant's salary.

In late August, China announced it was expanding consumption taxes on even more luxury goods.

While these things could spell trouble for high-end retailers, Mauron said companies so far are not worried, and remain focused on the traditional challenges of luxury brands.

“The key challenge, no matter what the context, around some controversy over gifting with corruption or problems, issues with the taxes, I think the main challenge is still the same,” Mauron said. “Which is how to boost the local consumption and how to find some reasons to buy locally when the consumers know it is more expensive.”

Affordable luxury

Luxury goods are even more expensive in China than overseas, because of high import and consumption taxes. That has led many Chinese to shop abroad in Europe and the United States in search of better deals.

Such savvy shoppers are part of China’s growing “affordable luxury” sector. Ken Grant, the head of FDKG Insight, said the sector is one that brands are finding new ways to reach.

"Luxury brands are all trying very hard to find new customers, which means they need to innovate in what they do, they need to introduce new products,” said Grant who is the head of FDKG Insight. “Perhaps products that they did not traditionally have, they are expanding their lines and maybe introducing some lower price point products to attract new consumers.”

First lady's influence

Demand is also growing for China’s own luxury goods. The wife of Chinese President Xi Jinping has helped boost interest in high-end Chinese fashion by wearing only locally designed brands on her trips overseas.

French luxury and retail group Kering has put its backing behind the jewelry company Qeelin. The brand combines Chinese culture with French craftsmanship. Chinese brand Shang Xia mixes modern design with Chinese culture, and its biggest investor is French luxury brand Hermes.

Without such backing, it is far more difficult for local brands to compete, Grant said. “They need to be around long enough and their challenge is whether they’ve got the stamina to do that or whether the people who invest the money are willing to invest for a long time,” he said.

Many traditional luxury brands took decades to establish their reputation. According to a recent survey, the World Luxury Index China 2013, of the most sought after luxury products in China, only one Chinese brand was among the top 50. That jewelry brand, Chow Tai Fook, was founded in China back in 1929.

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