Chinese luxury goods: the bear case

China’s Communist party presides over one of the more unequal societies on earth. A yawning gap between China’s rich and poor works to the advantage of European luxury goods groups with heavy exposure to the country, with higher income apparently correlating with stronger demand for discretionary items like velvet loafers and Cartier watches.

For the vast majority of Chinese people, such extravagances feel a long way away. Overall domestic consumption is perennially depressed, a fifth of young people are unemployed and China’s post-reopening recovery appears to have fizzled out. Shanghai’s CSI 300 is up 1 per cent since January.

France’s luxury-dominated Cac 40 remains close to an all-time high. Shares in the likes of LVMH, Hermès et Richemont slipped on Monday following Goldman’s lower Chinese GDP forecasts, but investors are still pretty bullish about the largest companies in the sector, safe in the knowledge, perhaps, that — per Morgan Stanley — less than 1 per cent of customers appear to be driving almost two-fifths of sales in China’s biggest luxury malls. There is more that unites us, etc.

Writing last week, Barclays analysts said “lower-for-longer growth” poses a “visible risk for the Chinese luxury growth thesis in the mid-to-long term”. The bank doesn’t appear overly worried, however, noting that very important persons have upped their spending so far this year:

Our ongoing conversations with luxury malls in China suggest continued momentum – luxury demand from domestic travel has returned (as a reminder, up to 50% of luxury sales in Beijing and Shanghai is contributed by non-local customers), the average spending ticket has continued to rise, and the very high end (e.g. VIPs) has increased its luxury spend since the beginning of 2023.

Morningstar, meanwhile, thinks luxury may be overbought:

We found that equity prices had significant predictive power of luxury sales prior to COVID-19 (59% lagged correlation of luxury industry growth on S&P 500 returns from 2007-19), while the Chinese property price downturn in 2015 preceded stagnation in global luxury sales in 2016 (real estate accounts for 60%-70% of savings among Chinese nationals). Hence, we believe the recent weakening of equity prices and real estate prices in China could lead to a slowdown in luxury demand going forward

Why do people buy this stuff in the first place? FT columnist Janan Ganesh suggests an “ingrained deference to Europe on certain questions of taste” partially explains wealthy Asians’ seemingly insatiable appetite for Givenchy/LVMH-labelled “tat”. Materialists at Morgan Stanley blame status anxiety in particular: 

The bank says “wealth, female empowerment, technology/social media [and] demography” — as well as “social stratification” — are among the reasons behind China’s growing demand for ostentatious goods.

Desmond Shum, author of Red Roulette, a memoir on working in Chinese finance, offered a similar diagnosis in early June, fresh from a call with an unidentified “leading authority” on all things glitzy and glam:

God is dead, in other words, but Gucci is forever. Or is it? Reuters ran the following this week:

Staff at a large Chinese state-owned mutual fund and a midsized bank have instructed staff not to show off high-end lifestyles, said employees at the firms, declining to be named due to the sensitivity of the matter.

The mutual fund has also asked staff to refrain from posting pictures of expensive meals, clothes or bags on social media, said an employee, to avoid attracting regulatory glare or public criticism.

The midsized bank’s employees have been asked to not wear luxury brands or carry luxury bags at workplace, said a person at the lender, adding staff have also been told they can’t stay at five-star hotels when travelling for work.

Senior executives at a state-owned insurance company have also been told to not wear expensive clothes to work, said another person with knowledge of the matter

China’s richest 0.001 per cent own a greater share of national wealth than the poorest half, according to the World Inequality Lab. Comparing Gini coefficients, China is more unequal than the US. Actually addressing material inequalities and their underlying causes would be a huge job, even for the CCP. But a superficial ban on superficiality sends all the right signals and requires a lot less work. 

Following crackdowns on the country’s technology and private education sectors, is it completely inconceivable that Beijing’s “common prosperity” drive one day ensnares Europe’s luxury brands?