China’s luxury restraint

Avi Krawitz

The decision by the Chinese authorities to clamp down on advertising luxury products is a red ‎flag for the diamond industry. While China represents the primary growth opportunity for the ‎trade, the government’s restrictions are presenting hurdles even if its intentions may be pure.‎

Earlier in February, just before the all-important Chinese New Year Spring festival, the Chinese ‎authorities enacted a ban on promoting luxury products as gifts for leaders on the country’s ‎official state radio and television channels. In particular, the restrictions applied to costly ‎watches, liquor, gold coins and the like. ‎

By doing so, the authorities are sending a worrying message to the market. Is this the first of ‎other interventions to curb luxury spending by the new leadership? ‎

The move is aimed at stopping corruption through elaborate gift-giving to officials.  Some ‎reports suggest it is also an attempt to ease the growing social frustration at the wealth gap ‎between rich and poor. ‎

China has tried to downplay the luxury sector in the past by placing restrictions on ‎advertisements promoting lavish lifestyles. It is clearly conscious of its social gaps, as it should ‎be. While official data shows the Gini coefficient – the core measure of income disparity – at ‎‎0.48 in 2010, a recent survey by Southwestern University of Finance and Economics in Chengdu ‎indicated that the more accurate reading should have been around an alarming 0.61 – the ‎higher reading showing the greater disparity. ‎

Both the corruption and income gap concerns are real and may present a tremendous ‎challenge to the country’s new leadership. Its fight against corruption should therefore be ‎supported and attempts to narrow societal inequalities encouraged.‎

But the country should aim to lift the income of the people with lower earnings rather than ‎stifle spending of the higher-end earners. Tackling these problems by attempting to curb ‎consumption is misguided, especially in the current economic environment. It is even more ‎difficult to comprehend given China’s focus on transitioning from an investment and export- ‎driven economy to one driven by consumption.‎

Investors expressed their concern as share prices of Burberry, LVMH, Richemont and Chow Tai ‎Fook all fell following the announcement. Consumers have shown similar caution. China’s ‎Ministry of Commerce reported that retail store and restaurant sales during this past Golden ‎Week rose 14.7 percent year on year, representing its slowest growth since 2009. ‎Encouragingly, gold, silver and jewelry sales outpaced other categories registering growth of ‎‎38.1 percent over Golden Week last year, spurred by the overlap of Valentine’s Day, according ‎to the ministry. ‎

Despite the jewelry numbers, the festival indicated that China is still as cautious in 2013 as it ‎was in 2012, which is understandable given the country’s current position. Many see it at a ‎crossroads, given not only the current political leadership transition that occurs once every ten ‎years, but also in its economic development. The aggressive double-digit economic growth ‎seen in the past decade was always going to prove unsustainable as the economy matures and ‎the country develops. ‎

But, as the government acknowledges, there are new growth stimuli on the horizon, most ‎notably in consumer spending. With the growth of China’s middle class, local consumption will ‎inevitably drive the economy. The authorities need to gear up for this. They must be seen to ‎be encouraging spending.  ‎

One obvious avenue would be to lower the import duties and taxations on luxury products to ‎embolden consumers to buy locally. Some estimate that the respective tariffs add between 30 ‎percent and 50 percent to the price of certain items. It is little wonder that scores of Chinese ‎nationals choose to make their purchases abroad. Consumers should be up in arms and the ‎debate has resurfaced in the media following this past Golden Week regarding the country’s ‎high duties. It is outrageous that they should make such lavish shopping trips overseas to make ‎their purchases because it’s cheaper to buy Louis Vuitton and Prada in Hong Kong, Paris or ‎New York, than it is in Shanghai. 

The Chinese travel bug has evolved into being more than just vacationing. More are planning ‎their trips with shopping in mind. Researchers at Bain & Company estimate that while the ‎Chinese bought about 25 percent of the world’s luxury goods in 2012, some 60 percent was ‎purchased abroad. The report estimated that Chinese consumers now make half of the luxury ‎purchases in all of Asia, and nearly one third of those in Europe. ‎

China cannot hide its penchant for luxury products and neither should it. The more it can ‎encourage some of that spending to return to the Mainland, the better it is for the economy, ‎and the more it helps to inevitably alleviate the income divide.‎

Similarly, corruption should be dealt with at its core, by clamping down on those officials ‎accepting such “gifts” rather than via superficial advertising restrictions. Besides, Bain noted a ‎growing need for luxury brands to focus on specific tastes and consumer preferences as less ‎than 25 percent of luxury spend is now dedicated to personal and business gifts. Ultimately, ‎the market aligns itself.‎

These trends are especially sensitive for the diamond industry, which has pinned such heavy ‎hope on China’s consumption growth. Indeed, any recent talk of an industry-led generic ‎advertising campaign has targeted China as the initial focus. Of course it has no choice – China ‎holds the greatest potential as a long-term growth engine for the industry.‎

But for many in the trade, China appears aloof and difficult to penetrate, requiring carefully ‎nurtured partnerships with local players to ensure success. And the more limitations put in ‎place, the more removed the country becomes. ‎

Even if the latest round of advertising restrictions were in practical terms marginal, they send a ‎negative message to the diamond industry, as it does the rest of the luxury market. For as ‎much as the trade is ready to embrace China, it may prove difficult if China is not yet ready to ‎fully welcome the trade. Let’s hope the recent advertising restrictions were indeed a one-off ‎attempt to curb corruption and not indicative of a general effort to restrain luxury spending.

Source Rapaport