This spring, hedonism, aristocratic lifestyles and the worship of foreign things are out – at least on Beijing billboards. The capital has banned outdoor ads promoting these and other practices that are not in keeping with “building a civilized spirit.”
The purge presumably aims to quiet dissatisfaction with inflation, which makes everyone feel poorer, as well as the wealth gap between the super-rich and the lower classes.
The problem goes far beyond a few sexy ads: Consumer confidence slumped to an all-time low in February. And in March, jittery consumers cleared supermarket shelves of soap and detergent following news that Unilever, Procter & Gamble, Guangzhou Liby Enterprise Group and Nice Group would hike prices.
To ensure stability for the next group of leaders who will take control in 2012, the government is targeting social inequality in the 12th Five-Year Plan. But Beijing is far from launching a real crackdown on luxury.
Instead, the government is making plans to support luxury sales on the mainland by lowering taxes on some products, like cosmetics. In a bid to boost tourism, the southern island of Hainan, occasionally referred to (generously) as “China’s Hawaii,” began offering mainland tourists duty-free purchases of up to RMB5,000 (US$762) in April.
Wealthy Chinese have traditionally gone abroad to buy most big-ticket items – thus the campaign’s swipe at “foreign things” – but this is changing. A recent report by McKinsey & Company says Chinese consumers now make 60% of their luxury purchases in the mainland.
But that still leaves a lot of revenue to be repatriated. Jewelry retailer Luk Fook generated 16% of 2010 revenue from its 500 mainland stores. Two-thirds of the company’s revenue came from 31 Hong Kong stores. Luk Fook estimates that PRC tourists account for more than half of its Hong Kong sales. Competitor Chow Sang Sang’s earnings tell a similar story.
Even without tax reform, the luxury segment remains resilient. Wealthy consumers care less about price increases, and inflation is encouraging purchases of investment items like gold. Expect any further regulation to continue focusing on the conspicuousness, rather than the consumption: The government and retailers have a common interest in bringing luxury business to the mainland.