Xi Jinping’s call for wealth redistribution threatens China’s luxury group boom

After targeting educational companies and tech moguls in a new interventionist push, will China come next for Birkin bags?

The question has worried investors in the world’s largest luxury goods groups since President Xi Jinping this month signaled that China “would regulate excessively high incomes and encourage high-income groups and businesses to return more to the economy. company”.

While the Chinese Communist Party had long allowed some to “get rich first,” it would now prioritize “common prosperity for all,” a commission led by Xi said, suggesting that measures to regulate income and redistributing wealth could be considered.

These few words were enough to reduce the collective market value of LVMH, Hermès, Kering, Richemont and Burberry by € 61.7 billion, or nearly 10%, since the August 17 announcement.

China has been the main engine of luxury growth, and the Covid-19 pandemic has only increased its importance. Spending on high-end jewelry and clothing has been repatriated to China as travel restrictions mean the Chinese can no longer travel to Milan or Paris to shop.

Led by the rising middle class of Gen Z and Millennials, Chinese consumers are expected to buy 45% of all luxury goods sold globally this year, up from 37% in 2019, according to Jefferies.

A small group of ultra-rich people – Jefferies estimates there are around 110,000 and each spend more than $ 100,000 a year on fashion and jewelry – account for nearly a quarter of luxury sales to Chinese consumers . If they feel that flaunting their wealth is suddenly taboo in Xi’s China, then the industry may soon experience a thrill.

The leaders of European luxury houses are still trying to figure out what could happen and whether they should react.

Yishu Wang, a London-based consultant whose agency Half A World helps luxury brands and high-end retailers grow in China, answered calls from concerned customers.

“I told them things might not change drastically right away, but for a while some really wealthy people, top CEOs, and top government officials are definitely going to be more careful about what they are doing. wear or show off in public, “she said.

“It may be prudent for luxury brands to remain a little more discreet. They might consider toning down the marketing campaigns they’re planning for this fall and winter so as not to focus on exclusivity or elitism.

Wang added that Xi’s statements could also usher in a more understated clothing design that departs from the bling and strong logos that are often popular in China.

The recent sell-off of luxury stocks halted an acceleration that had sent valuations to all-time highs, with the sector trading at a 90 percent premium over the MSCI Europe Index, against a historic average of 50 percent , according to UBS.

The pandemic turned out to be much less of a problem than feared, as wealthy American and Chinese consumers continued to spend. Over the past 18 months, the biggest brands such as Louis Vuitton from LVMH, Hermès and Chanel have taken shares, putting them on track to recover from this year, even as smaller houses continue to struggle.

Chart showing Chinese customers expected to account for half of global luxury goods sales

But some investors have started betting against the sector.

Short-term interest in Hermes rose to 0.9% of the float on Thursday, from 0.7% in mid-August, according to data from IHS Markit, while that of Richemont rose to 1.4% against 1.1% over the same period. However, there has been little change in interest in LVMH or Kering.

Despite the uncertainty surrounding any regulatory crackdown and its potential impact, others are less concerned.

“The Chinese opportunity is clearly even greater than the risks and if it wasn’t you wouldn’t want to be in the luxury at all,” said Flavio Cereda, analyst at Jefferies. “What you have now is just a lot of new uncertainties and that is making investors nervous.”

A Hermès store in Wuhan
A Hermès store in Wuhan © Getty

At a press conference in Beijing on Thursday, Han Wenxiu, a senior economic official, sought to reassure the public that the push for “common prosperity” did not mean that China “would steal the rich to help the poor.”

Analysts say China could raise taxes on expensive products, crack down on influencers who post on social media, impose advertising restrictions or step up border controls on daigou, professional buyers who travel abroad to buy on behalf of the Chinese. All of this could weaken the demand for luxury.

Another concern is that the government can rely on companies to reduce the long-standing price gap. Brands often charge 25-50% more for their products in China than in Europe, which is why Chinese buyers were spending so much when traveling before the pandemic.

A 29-year-old professional in Chengdu who occasionally buys luxury goods said the government’s change in tone had “no effect” she could see on the wealthiest consumers she knew. But policies such as a new inheritance tax or higher levies on investment or property income would affect the rich.

A Louis Vuitton advertisement in Shanghai
A Louis Vuitton advertisement in Shanghai © Qilai Shen / Bloomberg

Katie Sham, a consultant at Oliver Wyman in Hong Kong, said the wealth of the top 5-10% of consumers in China is “likely to be affected,” which “is certainly not good news for consumers. luxury players ”.

Chinese policies have already touched luxury. From 2012 to 2014, the first years of Xi’s anti-corruption campaign, Beijing cracked down on giving gifts to officials in exchange for favors. Sales of luxury goods and spirits grew at a slower pace during the period than before and after, analysts said.

“If Xi says and doesn’t do anything more about it over the next few months, you’ll see some recovery in stock prices, but the downgrade will stay,” Cereda of Jefferies predicted.

“If he keeps talking about it or announcing specific policies, then the market could go through a very volatile period.”

Additional reporting by Wang Xueqiao in Shanghai, Ed White in Seoul and Adam Samson in London

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