China denounces income inequality, shocks the spine on the luxury market
Last week, Chinese President Xi Jinping gave a speech setting out an objective to promote “common prosperity” across the country which has increasingly “only a few prosperous people,” state media Xinhua reported.
Addressing the Party Central Committee for Financial and Economic Affairs, Jinping defined “common prosperity” as “a wealth shared by all, both in material and cultural terms.”
To achieve this goal, he set policy goals to “adjust excess income”, increase the size of the middle-income group and crack down on illegal income in the name of “social equity and justice”. In other words, Jinping intends to redistribute the nation’s wealth, taking from the rich and giving from the poor.
The news sent shockwaves throughout the luxury market, whose income increasingly depends on the Chinese. The the Wall Street newspaper reported that a massive sell-off of shares in LVMH, Kering, Hermes and Richemont resulted in the loss of $ 70 billion in market value within a week of Jinping’s speech.
At its current rate of growth, China is expected to become the world’s largest luxury market by 2025, according to Bain in association with Altagamma. But if Chinese culture is opposed to the too rich, where the possession of luxury brands is the most visible symbol of this wealth, the plans of luxury brands could be wiped out.
Jefferies, the investment firm, was quick to point out that only a small number of the very wealthy are in the government’s sights, some 110,000 people. But it is estimated that they generate about a quarter of all luxury sales to the Chinese.
The company has also observed that “party disapproval” can suppress their luxury indulgences, but even consumers lower on the wealth ladder are likely to cut spending as well.
The luxury logos, which so many Chinese consumers proudly wear as a symbol of their growing fortunes, could become targets on their backs for not worrying about “common prosperity.”
Jinping’s message also implicitly intends to strengthen Chinese socialist culture or what he called “Chinese-style modernization.”
Luxury brands are an invention of the West. They represent Western meritocratic values which directly oppose the declared socialist policy of prosperity for all. It is difficult to see how keeping China’s borders open to more imported luxury goods will serve its purposes.
In recent memory, the Chinese government has opposed luxury, specifically offering expensive luxury goods to government officials. These anti-corruption policies caused sales of luxury goods to plummet, slowing luxury market growth from about 10% in the previous three years to just 2% in 2013, according to Bain.
But these actions were only aimed at one segment of luxury shopping – gifts – and not at all levels, which is under threat now.
“The demand for luxury is probably more correlated with the psychology of wealthy consumers than only financial means,” HSBC rightly observes in a statement to Quartz. The potential cultural turn against luxury consumption as a symbol of income inequality is a far greater threat to luxury brands than simply taking money out of the pockets of the rich and putting it in those who have it. less.
In May, Bain predicted that the luxury market would recover from pandemic losses by the end of 2022, although at the time they also predicted a 30% chance of a full recovery by the end. of this year. At the time, a full recovery in 2021 seemed within reach after LVMH, Richemont and Kering said all sales had returned to pre-pandemic levels, thanks to particularly large spending in China.
But Bain’s optimistic forecast was before the more contagious Delta variant raised its ugly head and jeopardized the global recovery. It feels like the chance of a luxury market recovery in 2021 or 2022 is receding, especially if Chinese consumers, who have had an insatiable appetite for luxury so far, see the writing on the Wall.
“If the Chinese sneeze, the luxury industry catches pneumonia,” Luca Solca, senior research analyst for luxury goods at Bernstein, told Daily Jing.
But this time it’s more than a sneeze from a summer cold. It’s a strong cough from a much more serious cultural illness that could pull back the luxury market in China and halt the meteoric growth that luxury brands rely on in the future.