For a long time, the People’s Republic of China was expected to become the world’s largest consumer of luxury goods. Now the future could look different. Sales of luxury goods rose there last year by 48 percent to around 54 billion US dollars. Now excessive incomes are to be adjusted and its national wealth is to be distributed more evenly.
China currently has one of the largest gaps in the world between rich and poor, and the government is determined not to widen that gap.
The message came in the run-up to the 20th National Party Congress, at which President Xi Jinping put “common prosperity” on his agenda. The news sent the luxury stock market on a downward slide, with LVMH stock falling nearly 10 percent. At the same time, investor and LVMH CEO Bernard Arnault pushed himself to third place on Forbes’ list of the richest people in the world.
Other brands suffered as well. Kering shares fell 9.47 percent, Richemont and Burberry posted similar losses of 6.6 percent and 5.51 percent, respectively.
An analysis by the Jing Daily predicts that the long-term effects of poverty eradication will fuel Chinese consumption and fuel economic growth. However, it is unclear what defines “inadequate income” and what consequences it will have for the upper class and the super-rich, who will be asked to pay and how they will be taxed.
Jing Daily drew a comparison: “In 1991 the US attempted a similar approach when President George HW Bush imposed luxury taxes on expensive goods such as yachts, private planes, jewelry and automobiles in an attempt to reduce the country’s budget deficit. The law, however, remained incomplete due to the disastrous effects it had on various industries. ”Two years later, Bill Clinton withdrew it due to job losses and earnings revisions.
Chinese customers in particular have continued to buy European luxury brands during the pandemic, which is why investors are on the alert. China’s growing middle class has fueled much of the luxury growth, with “demand for luxury correlating more with the psychology of affluent consumers than just financial resources,” commented analysts at British bank HSBC on China’s agenda.
On income inequality, “luxury demand comes not just from bubbles here and there, but from inequalities in the nature of the Gini coefficient,” according to HSBC. “A good example of this was the economic recovery in the US, where wealthy individuals benefited from the stock market, second home markets and staycationing and had more resources to spend, and they did.”
60 billion euros have been wiped out of the value of European luxury stocks
Eradicating poverty should be a goal of every government, but taxing wealth redistribution may be bad news for the luxury industry, according to the Wall Street Journal. “A small group of very wealthy people – Jefferies estimates that there are only 110,000 – are responsible for around a quarter of all luxury sales in China, which is now the most important buyers in the industry by nationality. The risk of higher taxes and party disapproval could slow these sales drivers. “
Chinese tech giants are feeling a similar response, and their stocks have at times lost $ 50 billion in collective value to newly proposed competition rules in China.
Data from Bain and Altagamma shows that China is well on its way to becoming the world’s largest luxury market by 2025. But, as Luca Solca, senior research analyst for luxury goods at Bernstein, told Jing Day. “When the Chinese sneeze, the luxury sector gets pneumonia.”
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