(CNN) – Chinese President Xi Jinping’s national campaign for “shared prosperity” has cast a shadow over an industry that the country counts as one of the country’s largest markets: luxury goods.
Xi’s advance, wealth redistributing in the world’s second largest economy has unsettled some luxury market investors. The sector still bears the scars of extensive government crackdowns on corruption a few years ago and is now relying more than ever on Chinese consumers.
Buyers in mainland China are more critical to brands like LVMH, Hermes and Gucci Meaning. Last year, as the coronavirus pandemic spread around the world, China’s case numbers remained relatively low and the country’s share of the global luxury market has roughly doubled, according to consulting firm Bain. The company predicts that China will become the world’s largest market by 2025, overtaking Europe and the US.
The latest government initiative – which coincides with regulatory crackdown on industries from technology and education to gaming and entertainment – has Raised concerns. However, experts disagree on whether “shared prosperity” will hurt luxury sales, which run into the hundreds of billions of dollars annually.
Many analysts believe the campaign could actually be good for business. As Xi’s plans are still taking shape, his government has made it clear that it ultimately wants to raise the incomes of more households and expand the middle class. That, in turn, could help boost purchasing power and consumption.
However, experts have not ruled out the possibility that the government may crack down on signs of supposed extravagance or raise taxes for the rich, which increases the prospects for high-end handbag makers , Shoes and jewelry could tarnish.
“At first, people panicked,” said UBS analyst Zuzanna Pusz of the promise of “mutual prosperity”. “And the market panicked. Because everyone came back with their memories of the anti-transplant campaign and the impact of luxury demand back then.”
Some players have already taken a hit. LVMH’s shares fell 7.9% from August to September, while Gucci owner Kering was down 19.4% over the same period.
“Over the past three months, the [luxury] sector has grown lagging the European market … due to renewed concerns in China, “including the wealth redistribution campaign, a flare-up of coronavirus cases and regulations, Citi analysts wrote in an October report.
But the stake increased in August, when Xi told the top leaders of the ruling Chinese Communist Party that the government should establish a system of wealth redistribution in the interests of “social justice.” According to the state-run Xinhua News Agency, Xi said it was “necessary”, “excessively.” adequately regulate high incomes and encourage high-income people and businesses to return more to society “. State media have suggested that the government might consider taxation or other means of redistributing income and wealth.
Some companies have taken the notice from Beijing. In the past few months, several of China’s largest tech companies have pledged to donate billions of dollars to the cause, including Alibaba and Tencent. One company, Pinduoduo, even promised to hand over all of its earnings for the second quarter.
There have been signs of concern in the luxury world. The sector has recently declined in popularity with some investors, suggesting that near-term uncertainty surrounding China has been priced in, UBS analysts wrote in a September report.
“The impact of China’s joint prosperity initiatives luxury consumption … remains the main concern of investors, “they added.
Analysts at the Swiss bank also note that” shared prosperity “is not a new concept in China.
Use of the term is sufficient to the time of Chairman Mao Zedong, who invoked “common prosperity” when he campaigned for dramatic economic reforms to take power from the wealthy landowners and farmers, the rural elite.
In 2012 “Shared prosperity” was “considered the” basic principle “of Chinese socialism at a large Communist Party gathering,” Tao Wang, a UBS economist, said in a K. The bank’s analysts also say they expect “modest and gradual” adjustments to income tax and excise tax over the next few years, suggesting that “the negative effects will be limited and not imminent”.
Earlier this month, LVMH’s chief financial officer Jean Jacques Guiony said he was “not particularly concerned or concerned about the recent announcement”.
“We see no reason to believe that this is the top Middle class, the affluent class that makes up the bulk of our customer base, could harm, ”he told analysts. “So this doesn’t seem negative to us – if not positive.”
Last week Nicolas Hieronimus, CEO of L’Oreal, which includes brands such as Giorgio Armani Beauty and Lancôme, also got involved. </ P "We remain very optimistic about China," he said during a sales call with companies, adding that the promise of "shared prosperity" would likely help make the country's middle class "wealthier and bigger," which we do is positive.
Less than a decade ago, the luxury industry was hit hard by a massive anti-corruption campaign in China. The government has removed any sign of wasteful spending by officials, including on luxury goods.
The campaign launched by Xi in 2012 had a dramatic impact on the industry. According to Bain, the luxury market in mainland China only grew 2% in 2013, compared to 7% the previous year.
Some fashion brands were shunned as shoppers sought less eye-catching logos or designs. People “don’t want to just walk around with big LVs anymore,” said Patricia Pao, CEO of Pao Principle, a luxury brand consultant in China, to CNN at the time.
Premium liquor brands like Baijiu maker Koftow Moutai also had one significant decline in sales. The company later said the campaign resulted in “unprecedented pressure” on the alcohol industry.
The sector is still facing regulatory concerns and was recently hit by a stock sell-off.
During the 2012 anti-corruption crusade Upscale hotels also suffered when officials canceled banquets and conferences. Some five-star hotels even asked to subtract a star at the time in hopes that the lower ratings would allow them to appear less opulent and do business, Chinese state media reported.
It doesn’t help that companies ranging from the booming tech sector to private education in China have recently been targeted by yet another raid that has spread to the entertainment and live stream shopping industries.
” Since there has obviously been quite a bit of news in the marketplace about various other industries being affected by various measures taken by the Chinese government, I think there was a bit of anticipation from people, [like], ‘Okay, what if luxury ? next? ‘”she said.
According to Bain’s latest estimates, buyers in China account for 35% of all luxury sales worldwide. By 2025, the company suggests this could rise to nearly 50%.
Bruno Lannes, a Shanghai-based partner of Bain’s Consumer Products and Retail Practices, said his company is not changing its outlook on the promise of “shared prosperity.” “It’s too early to say, but it is gives no real indication that this is having a big impact on brands, I think, “he told CNN Business.
Lannes believes recent policies are” neutral “or” positive “on luxury consumption especially if it increases incomes across the country.
“I think it’s very different from the anti-corruption campaign back then,” he added.
Previously, many luxury brands in China were driven by tradition that executives or civil servants Gesche nke were given or received, which was a big goal of the campaign, noted Lannes. Now it is largely “borne by people who consume for themselves or their relatives,” he said.
According to LookLook, a consumer research firm that works with luxury brands, one in ten respondents in a recent poll named out of 100 Luxury shoppers in China use government crackdown on excessive wealth as a reason they don’t spend so much these days.
A participant in the study, published in September, cited wanting “not to attract unwanted attention” as saying LookLook CEO Malinda Sanna.
“We’ve never heard that before,” she said. “I think the demand is definitely still there, but they’re cautious.”
This story was first published on CNN.com. President Xi Jinping’s promise to redistribute wealth brings back bad memories for luxury brands in China
ANALYSIS: President Xi Jinping’s promise to redistribute wealth brings back bad memories among luxury brands in China
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