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China Deluxe

By staff reporter ZHAO YAYUAN

Wang Yenan, like many other young urban professionals her age, has always been obsessed with spotting the latest fashion trends. She spends in excess of RMB 100,000 annually buying bags and clothes from brands like Louis Vuitton and Chanel.

The latest statistics from the World Luxury Association (WLA) released on December 2, 2009 showed that luxury purchases in China had increased to US $9.4 billion annually, making up 27.5 percent of global luxury consumption. This compares to the lesser US $8.6 billion in January 2009. China’s luxury market is estimated to hit US $14.6 billion, topping all other countries in the world. China has usurped the U.S. as the second largest consumer of high-end goods, and is now second only to Japan.

Gucci on every corner: Top luxury outlets have become ubiquitous in China's biggest cities.                                            China Foto Press 

Easy Come, Easy Go

The 2009 China's Luxury Goods Market Research Report, issued by leading business consulting agency Bain & Company in November 2009, revealed that the global luxury goods market, influenced by the economic recession, was expected to decline by 8 percent in 2009. The only exception to the rule was China, which is expected to move forward with a moderate 12 percent growth. Other data confirms that China might be the lone bright spot in a dim world market.

The Bain & Company report indicates that China’s eye-popping performance was owed to the nation’s strong recovery momentum in the second quarter of 2009, in addition to a steady growth of the middle class and an ever-swelling population eager to consume.

Another report released by McKinsey & Company in July 2009 pointed out that the number of wealthy people in China would soar into fourth place globally. As of 2008, there were 1.6 million households with an annual income higher than US $ 80,000, a figure expected to expand to 4.4 million households by 2015.

McKinsey’s survey reveals a unique characteristic of China’s wealthy class – 80 percent of them are under the age of 45, compared with merely 30 percent in the U.S. and 19 percent in Japan.

Luo Laijun, a young scholar at the Department of International Economics, School of Economics at Renmin University of China, analyzed the need to purchase luxury goods from a psychological perspective. He concluded that there were two conditions that could explain the rise. “First, simply increasing purchasing power among the people of China has led to higher consumption. Second, luxury goods have a higher cost-utility ratio (CUR). Some individuals like to squander their entire fortunes on luxury goods in an effort to show off, or purely for excitement, even though their incomes are not high enough to buy such luxury goods. In terms of the CUR, the return is naturally greater with a brand name purchase.

Catering to consumption trends, some institutions such as Peking University and the WLA-China Club have launched special training sessions for managers in luxury goods makets. In April 2009, PKU School of Art began recruiting students for its “Advanced Training Classes in Fashion Luxuries Management,” charging RMB 105,000 per student for the program. Many people remarked that these classes are yet another type of luxury consumption.

Models of Consumption

Luxury consumption is not limited to the wealthy classes; it tends to set an example for others to follow.

Zhu Min, aged 26, works at a state-owned enterprise in Nanchang, capital of Jiangxi Province. She spent four months’ salary on a wristwatch she saw during a business trip in Beijing. She had first spotted it in a fashion magazine, and then tore apart her home city to no avail looking for it. “It’s really expensive and I bought it with a heavy heart,” said Zhu. “Fortunately it’s delicate and eye-catching. I see it as a kind of reward to myself for all my hard work over the last three years.”

Along with the practicality of an item, more and more people are becoming conscious of designs in vogue. Wang Dan works for a furniture outlet carrying a high-end Italian brand, well known for its cleverly designed chairs and decorative lights. A chair can cost up to RMB 10,000 and they have nothing worth less than a few thousand. “Designers and celebrities are regular patrons of our shop,” he said, “as well as those addicted to certain brands.”

Perusing foreign fashion magazines that her father brings home from his trips abroad is a special part of Wang Yenan’s life. Her interest focuses on all types of designer handbags. “I grew up following these brands,” she confessed. “Most of my colleagues and friends are buying or using these handbags, so we influence one another and share opinions on such topics.” Though she spends heavily on bags, she doesn’t see herself as the craziest of the bunch. “Occasionally I visit small boutiques, but most of my friends only buy name brand luxury goods, and wear logos from head to toe. In their minds these brands best reflect their taste for high quality and value.”

Although Chinese consumers eat up a quarter of the world’s luxury goods, it does not indicate the overall improvement in people’s living standards. Frugality is not only a traditional Chinese virtue but also a lifestyle that many still insist on. Currently China’s per capita GDP is only around US $3,200. “If I were really wealthy, I would buy better and more expensive stuff. A Louis Vuitton handbag denotes a certain identity, ability and social status,” said Ms. Chen, who is saving for a house and for her wedding. “But if one cannot afford to buy a car and house, which are basic needs, it makes no sense to spend a month’s salary on a bag. Even if I did buy a real one, people would assume it’s a fake.”

Up or Down?

The China General Chamber of Commerce (CGCC) recently issued a report on the “Outlook for China’s Top Ten Business Hotspots in 2010.” It predicted consumer products sales would continue to rise and listed among the hotspots a domestic luxury goods market with huge potential and no signs of slowing down.

But statistics show that in 2008 the luxury goods market in the Chinese mainland made up only 40 percent of the nation’s total luxury consumption. “I travel to Hong Kong for shopping every year as well as to the U.S. and Europe. Not to mention all the gifts my father buys me each time he travels overseas,” said Wang Yenan. She claims she prefers to buy luxury items in Hong Kong or in foreign countries. “I buy them in the Chinese mainland only when I find something great and I am too eager to wait. After all, it’s much cheaper to buy such stuff abroad.”

The CGCC believed that heavy taxation has resulted in an outflow of purchasing power. It therefore recommended a cut in tax rates to allow luxury consumption a favorable climate in China.

In August 2009, Jiang Zengwei, Vice-Minister of Commerce, published an article entitled “Unswervingly Expanding Consumer Demand.” He points out in the article, “Owing to increasingly robust incomes, the appreciation of the RMB against foreign currencies, and price differences between domestic and overseas markets, Chinese travelers appear to prefer to make high-end purchases in foreign markets.” The article suggests that one way to keep the money at home is to cut the tax on luxury goods such as cosmetics and wristwatches.

Luo Laijun holds a slightly different view on this matter. He said, “It does not matter much whether we cut the tariffs or not. First of all, to those who buy luxury goods abroad, a lower price is not the only consideration. Quality is more important. Second, it’s foreign companies that earn the profits whether these products are sold domestically or abroad. High tariffs and sharpening the competitive edge of Chinese luxury goods producers should be part of the optimal strategy.”

VOL.59 NO.12 December 2010 Advertise on Site Contact Us