President Xi Jinping’s promise to redistribute wealth reawakens bad memories of luxury brands in China

Many analysts believe the campaign could actually be good for businesses. While Xi’s plans are still being formulated, his government has made it clear that it wants to ultimately increase the incomes of more households and expand the middle class. This, in turn, could help increase purchasing power and consumption.

But experts have not ruled out the possibility that the government could limit signs of alleged extravagance or raise taxes for the rich, which could tarnish the prospects for makers of high-end handbags, shoes and jewelry.

“Initially, when this was announced, people panicked,” Zuzanna Pusz, an UBS analyst, said of the promise of “common prosperity”. “And the market panicked. Because everyone kind of came back with their memory of the anti-vaccination campaign and how it affected the demand for luxury at the time.”

Some players have already scored. Shares of LVMH fell 7.9% from August to September, while shares of Kering, owner of Gucci, fell 19.4% over the same period.

“It ‘s been in the last three months [luxury] The sector has failed in the European market … based on China’s renewed concerns, “including a campaign to redistribute wealth, a coronavirus outbreak and regulation,” Citi analysts wrote in an October report.

A call for “common prosperity”

Beijing has tightened the screws on private companies over the past year.

However, the weight was raised in August when Xi told top leaders of China’s ruling Communist Party that the government should set up a system to redistribute wealth in the interest of “social justice”.

According to the state-run Xinhua news agency, Xi said it was “urgent” to “reasonably regulate excessively high incomes and encourage high-income people and businesses to return to society more.” State media suggested that the government could consider taxation or other ways to redistribute income and wealth.

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Some companies have taken the hint from Beijing. There have been several of China’s largest technology companies in recent months promised to donate billion dollars for the purpose, including Alibaba (GRANDMA) in Tencent (TCEHY). one company Pinduoduo (PDD), even promised to hand over total profit for the second quarter.

Signs of apprehension have appeared in the world of luxury. Recently, the sector has lost favor with some investors, which “hints that the price was short-term uncertainty associated with China,” UBS analysts wrote in a September report.

“The impact of China’s common welfare initiatives on luxury spending … remains a key investor concern,” they added.

But analysts at the Swiss bank also note that “common prosperity” in China is not a new concept.

The use of the term dates back to the time of President Mao Zedong, who referred to “common prosperity” when he advocated dramatic economic reforms to take power away from wealthy landowners and farmers, the rural elite.

Shoppers at the prestigious Beijing Trade Market in August.  Many analysts believe it is

In 2012, “common prosperity” was “considered” a fundamental principle of “Chinese socialism” at a major Communist Party meeting, Tao Wang, an UBS economist, warned the parties in a report.

Analysts at the bank also say they expect only “modest and gradual” adjustments to income tax and consumption tax over the next few years, suggesting that “the negative effect may be limited rather than inevitable.”

Chinese buyers give luxury brands some hope

Some top executives have addressed this issue directly.

Earlier this month, LVMH chief financial officer Jean Jacques Guiony said he was “not particularly concerned or concerned about the recent announcement.”

“We see no reason to assume that this could harm the upper middle class, the wealthy class, which is the bulk of our customer base,” he told analysts. “So it seems to us that this is not negative – if not positive.”

Nicolas Hieronimus, CEO of L’Oreal, which owns brands such as Giorgio Armani Beauty and Lancôme, also came forward last week.

“We remain very confident for China,” he said in a business sales call, adding that the promise of “common prosperity” is likely to help make the country’s middle class “richer and bigger.” [which] it’s very positive for us. “

A sensitive topic

However, industry observers have good reason to worry.

Less than a decade ago, the luxury industry was hit hard anti-corruption drive in China. The government has destroyed all signs of copious spending among officials, including on luxury goods.
The campaign, introduced by Xi in 2012, has had a dramatic impact on the sector. In 2013, the luxury market in mainland China grew by only 2% compared to 7% the previous year. Bain.
Some fashion brands were avoided as customers looked for less eye-catching logos or designs. People “don’t want to walk around with big LVs anymore,” says Patricia Pao, CEO of Pao Principle, a luxury brand consultant in China, told CNN at the time.
Customers in August in line to enter the Louis Vuitton store in Nanjing in Jiangsu Province in eastern China.
Also brands of premium alcoholic beverages such as baijiu manufacturer Kweichow Moutai sales fell sharply. The company later said the campaign had put “unprecedented pressure” on the alcohol industry.

The sector is still facing regulatory concerns and has recently been hit by a sell-off of shares.

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Elegant hotels also suffered during the 2012 Crusade against Corruption, as officials canceled banquets and conferences. Some five-star hotels at the time even asked for a star in hopes that lower ratings would make them look less luxurious and keep the business, Chinese state media reported.
It does not help that companies ranging from a thriving technology sector to private education in China they have been the target of another lately suppressed, which spilled over into fun in live shopping industry.

Pusz, an UBS analyst, said this may have contributed to the discomfort.

“As there has obviously been a significant flow of news in the market about several other industries affected by the various measures taken by the Chinese government, I think there was little expectation from the people, [like]: ‘Okay, what if luxury comes first?’ ”She said.

Times have changed

However, some analysts believe that this repression could be different.

According to the latest Bain estimates, the buyers are in China represent 35% all sales of luxury products worldwide. By 2025, the company predicts this could reach almost 50%.

Bruno Lannes, a partner at Bain’s consumer products and retail practices based in Shanghai, said his company is not changing its forecasts because of the promise of “shared prosperity”.

“It’s too early to tell, but there are no real signs that this would have a significant impact on brands,” he told CNN Business.

Lannes expects the latest policy could have a “neutral” or “positive” effect on luxury spending, especially if it raises incomes across the country.

“I think it’s very different from what happened [with] the anti-corruption campaign at the time, ”he added.

Previously, many luxury brands in China were guided by a tradition of executives or officials giving or receiving gifts, which was a major target of the campaign, Lannes noted. Now the consumption is mostly “people who spend for themselves or for their relatives,” he said.

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However, some consumers may already be starting to hold back on consumption.

According to LookLook, a consumer research firm working with luxury brands, 1 in 10 respondents in a recent survey of 100 buyers of luxury goods in China cited government repression of excessive displays of wealth as a reason not to waste so much these days.

One participant in the study, released in September, stated a desire not to “attract unwanted attention,” LookLook CEO Malinda Sanna said.

“We’ve never heard that before,” she said. “I think the demand is certainly still there, but they’re careful.”

– Laura Contributed to this report.


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