China Talks About Fixing Income Inequality. Are Luxury Brands Listening?
Chinese President Xi Jinping recently gave a speech laying out a goal to promote “common prosperity” across the country that increasingly has “only a few people prosperous,” the state-run news outlet Xinhua reported.
Speaking to the Party’s Central Committee for Financial and Economic Affairs, President Xi defined “common prosperity” as “affluence shared by everyone, both in material and cultural terms.”
To achieve that goal, he laid out policy objectives to “adjust excessive incomes,” increase the size of the middle-income group and clamp down on illicit incomes in the name of “social fairness and justice.” In other words, he intends to redistribute the nation’s wealth, taking from the rich and giving to the poor.
The news sent shock waves throughout the luxury market, which is increasingly dependent upon the Chinese for revenues. The Wall Street Journal reported that a massive selloff of LVMH, Kering, Hermès and Richemont stocks resulted in the loss of $70 billion in market value in the week following President Xi’s speech.
At its current pace of growth, China is predicted to become the world’s largest luxury market by 2025, according to Bain in association with Altagamma. But if the Chinese culture moves against the excessively wealthy, where owning luxury brands is the most conspicuous symbol of that wealth, luxury brands’ plans there could be crushed.
Jefferies, the investment firm, was quick to point out only a small number of very wealthy individuals are in the government’s crosshairs, some 110,000 people. But they are estimated to generate about a quarter of all luxury sales to the Chinese.
The firm also observed that “party disapproval” may suppress their luxury indulgences, but even those consumers lower on the wealth scale are likely to dial back their spending too.
Luxury logos, which so many Chinese consumers have worn proudly as a symbol of their rising fortune, could become targets on their backs of not caring about “common prosperity.”
Also implicit in President Xi’s message is his intention to strengthen the socialist Chinese culture or what he called “Chinese-style modernization.”
Luxury brands are an invention of the West. They represent Western meritocratic values that directly oppose the stated socialist policy of prosperity for all. It is hard to see how keeping the Chinese borders open to more imported luxury goods will serve his goals.
In recent memory, the Chinese government moved against luxury, specifically gifting expensive luxuries to government officials. Those anti-corruption policies sent luxury goods sales tanking, resulting in a slow down in the luxury market’s growth from around 10% in the three preceding years to only 2% in 2013, according to Bain.
But those actions only took aim at one segment of luxury purchases – gifts – not across the board, which is what is threatened now.
“Luxury demand is likely more correlated to wealthy consumers’ psychology more than just to financial means,” HSBC correctly observes in a statement to Quartz. The potential cultural turn against luxury consumption as a symbol of income inequality is a much greater threat to luxury brands than simply moving money from the wealthy’s pockets and putting into those with less.
Back in May, Bain predicted the luxury market would recover from the pandemic losses by the end of 2022, though at the time they were also projecting a 30% probability for a full recovery by the end of this year. Back then, full recovery in 2021 looked within reach after LVMH, Richemont and Kering all reported sales had returned to pre-pandemic levels, thanks to especially strong spending in China.
But Bain’s optimistic forecast was before the more contagious Delta variant raised its ugly head and put the whole world’s recovery in jeopardy. It feels like the chance of a 2021 or 2022 luxury market recovery is slipping further away, especially if Chinese consumers, who’ve had an insatiable appetite for luxury up until now, see the writing on the wall.
“If the Chinese sneeze, the luxury sector gets pneumonia,” said Luca Solca, senior research analyst for luxury goods at Bernstein, to Jing Daily.
But this time it’s more than the sneeze of a summer cold. It’s a loud cough of a much more serious cultural illness that could push the luxury market back on its heels in China and halt the sizzling growth luxury brands are counting on there in the future.