Since China emerged from the first wave of Covid-19 lockdowns in 2020, the country’s shoppers haven’t been able to get enough Hermes sneakers and Louis Vuitton handbags. Their so-called “revenge spending” has fueled a rebound in sales of upmarket goods—and sent luxury valuations soaring—to heights that are nothing short of remarkable.
But the party might be crashing to a halt. The past few weeks have brought some concerning signals from China: Covid-19 cases are rising, retail sales are slowing and most worrying, a government crackdown on certain growth sectors and comments from President Xi Jinping about the need for “common prosperity” raise the possibility of curbs on overt shows of wealth. That’s the wrong vibe for making extravagant purchases.
Although Americans have also been buying more Cartier watches and Gucci handbags, Chinese consumers are the number one driver of global sales of top-end goods. If demand from the country’s big spenders starts to evaporate, that would have dire consequences for the luxury houses.
China’s recovery from the pandemic seems to be stalling with the spread of the delta variant in pockets of the country. Domestic travel, which was opening up, has now been restricted. As of early August, provinces were advising residents not to travel unless it was necessary. Trains have been suspended and some airports have been temporarily closed as officials take measures to contain the virus and test widely. On top of this, recent flooding in central China has also hit consumer demand quite hard.
The travel restrictions get in the way of luxury brands’ plans to expand their presence on the island of Hainan, a province that’s been remade to become a large free-trade port.
Government scrutiny on technology and internet firms has also soured sentiment within the business community and among the big spenders. It has led to growing uncertainty about future regulation and cast a shadow over e-commerce channels for luxury brands like Alibaba Group Holding Ltd.’s dominant Tmall Luxury Pavilion. All of this can have a negative wealth effect, sapping the motivation to splash out.
This week, at a meeting on financial and economic affairs, Xi Jinping turned his attention to “common prosperity.” While officials have often talked about wealth redistribution and income inequality, recent moves show it’s now becoming a priority. “Rather than being egalitarian or having only a few people prosperous,” the term refers to “affluence shared by everyone, both in material and cultural terms, and shall be advanced step by step,” state media noted, citing comments from the meeting.
The worry is that this is a prelude to repressing conspicuous consumption, much like China’s anti-corruption clampdown almost a decade ago.
Attempts to redistribute wealth could be overt (for example, through raising taxes on the affluent) or subtle (through rhetoric designed to discourage flashy displays). Either way, they are not going to be conducive for buying and toting around Chanel or Loewe.
There would be less pain if there are parallel efforts to expand the middle class, which could create more first-time luxury buyers. But so-called VIPs, people who shell out more than 100,000 euros ($116,960) a year on luxury goods, account for a quarter of total Chinese spending, according to analysts at Jefferies. So targeting them would be particularly damaging.