Because of the 30% luxury tax in Mainland China, for many Chinese consumers, a trip to Hong Kong is justified when purchasing big ticket items from Hermès or Patek Philippe
Nathalie Omori, senior partner of Zhenji, wonders if the Chinese market is really shrinking, or if it’s merely a case of the available data being incorrectly analysed
As internal Chinese demand for luxury goods slows and the incredible surge of western luxury brands over the past few years is challenged, many wonder what growth to expect from the Chinese luxury market in the coming year. Meanwhile, experts predict this will become the world’s largest luxury market (in front of the US) by 2015 or 2020. Is the market really shrinking, or is the available data not being correctly analysed?
On the one hand, in China, Upper Middle Class purchases (mainly watches, luggage and clothing) are no longer growing and even seem to decline. On the other hand, we have seen foreign luxury markets boosted by the Mainland Chinese buyers.
In Paris, after an unending, record year, luxury stores are out of inventory. Patek Philippe or Breguet limit sales to the Chinese to one watch per passport, in order to keep some for the other buyers. Hermes is overloaded by demand for its large coloured (pink, green, blue, anis) Birkin bags. Cartier on the Champs Elysees does not have enough inventory to put the new collection on display. Jimmy Choo is out of eel skin … All this, thanks to (or because of) the Chinese.
“ In China, Upper Middle Class purchases are no longer growing. On the other hand, we have seen foreign luxury markets boosted by Mainland Chinese buyers ”
The phenomenon is not unique to France. In New York for the first time, Tiffany’s flagship store on Fifth Avenue has acknowledged its growth in the first semester is linked to the Chinese tourists. In London, Global Blue de-taxing institute has noted a 50% growth in Chinese purchases.
The Chinese luxury market is very peculiar.
Due to a 30% tax on luxury products (luxury products being defined very widely), these products cost 30-50% more in China than in France, where the same product is sold tax-free to foreign tourists. This cost differential exists everywhere around the world, since it is in China, a “socialist market economy”, that luxury products are the most expensive, precisely because of this tax.
In such a context, purchasing a Patek Philippe watch or a Birkin bag in Mainland China is so expensive that its justifies, in itself, a trip to Hong Kong or (if one has more time) to Europe.
For a long time this phenomenon was not fully understood, because foreign visas were difficult to obtain, which was a real obstacle for the Chinese. This is no longer the case, and with guarantee deposits, European embassies now deliver visas much more easily.
“ Should the 30% luxury tax be condemned or celebrated for globalizing the purchases of the Chinese? ”
Luxury sales are shrinking in China but growing exponentially abroad because of the Chinese. What is the real size of the Chinese luxury market, when three out of four luxury purchases by the Chinese are made outside Mainland China, starting with Hong Kong, and continuing in Paris or New York? Are the luxury purchases of Americans, hobbled by a weak dollar, multiplied by four due to huge purchases by Americans abroad? No.
Should we measure sales of the onshore Chinese market – which is currently the second largest luxury market – or global sales to Chinese nationals, which surpass those to any other nationality around the world? Is the Chinese luxury market shrinking or is it just moving to other countries and spreading throughout the world? Should the 30% luxury tax be condemned or celebrated for globalizing the purchases of the Chinese?
Finally, what could be the rate of employment of qualified Chinese youth in the national luxury sector, if the government eliminated this tax and allowed China as a country to develop a fully functional luxury market? This is a difficult question, which should be seriously considered by a country that struggles to offer adequate job opportunities for its highly educated students, in an increasingly competitive world.