Many analysts believe the campaign may in fact be good for business. While Xi’s plans are still taking shape, his government has made it clear that it ultimately wants to increase the incomes of more households and expand the middle class. This, in turn, could help increase purchasing power and consumption.
But experts haven’t ruled out the possibility that the government will crack down on signs of perceived extravagance or raise taxes for the rich, which could cloud the outlook for makers of high-end handbags, shoes and jewelry.
“At first, when it was announced, people panicked,” UBS analyst Zuzanna Pusz said of the promise of “common prosperity.” “And the market panicked. Because everyone kind of came back with their memories of the anti-graft campaign and the impact of luxury demand back then.”
Some players have already taken a hit. LVMH shares slipped 7.9% from August to September, while Kering, owner of Gucci, fell 19.4% over the same period.
“In the past three months, the [luxury] the sector has underperformed the European market … on the back of China’s renewed concerns, “including the campaign of wealth redistribution, a surge in coronavirus cases and regulations, Citi analysts wrote in a report. ‘October.
The call for “common prosperity”
Beijing has tightened the screws on private enterprise over the past year.
But the challenge was lifted in August, when Xi told senior leaders of the ruling Communist Party of China that the government should establish a system of wealth redistribution in the interests of “social fairness.”
According to the state-run Xinhua News Agency, Xi said it was “necessary” to “reasonably regulate excessively high incomes and encourage high-income individuals and businesses to re-enter society.” State media have suggested that the government may consider taxation or other means of redistributing income and wealth.
Some companies have followed Beijing’s hint. In recent months, several of China’s biggest tech companies have pledged billions of dollars to the cause, including Ali Baba (BABA) and Tencent (TCEHY). A company, Pinduo (PDD), even promised to sell all of its second-quarter earnings.
There have been signs of apprehension in the luxury world. Recently, the sector has fallen out of favor with some investors, which “suggests that short-term uncertainty related to China has been taken into account,” UBS analysts wrote in a September report.
“The impact of China’s common prosperity initiatives on luxury consumption (…) remains the main concern of investors,” they added.
But analysts at the Swiss bank also note that “common prosperity” is not a new concept in China.
The use of the phrase dates back to the days of Chairman Mao Zedong, who invoked “common prosperity” when he advocated dramatic economic reforms to take power away from the wealthy landowners and farmers, the rural elite.
In 2012, “common prosperity” was “considered the” fundamental principle “of Chinese socialism” at a large Communist Party rally, Tao Wang, an economist at UBS, noted in a report to clients.
Bank analysts also say they expect “modest and incremental” personal income tax and consumption tax adjustments over the next few years, suggesting that “the negative impact could be limited and not imminent ”.
Some senior executives have addressed the issue directly.
Earlier this month, LVMH chief financial officer Jean Jacques Guiony said he was “not particularly worried or concerned about the recent announcement.”
“We see no reason to believe that this could be detrimental to the upper middle class, the well-to-do class who make up the bulk of our clientele,” he told analysts. “Therefore, it seems to us not to be negative – if not positive.”
Last week, Nicolas Hieronimus, CEO of L’Oréal, which owns brands such as Giorgio Armani Beauty and Lancôme, also intervened.
“We remain very confident in China,” he said on a company phone visit, adding that the commitment to “common prosperity” would likely help make the country’s middle class “richer and more richer. big, [which] is very positive for us. “
A sensible subject
Industry watchers, however, have good reason to be concerned.
Less than a decade ago, the luxury industry was hit hard by a massive anti-corruption campaign in China. The government has eliminated all signs of lavish spending among officials, including on luxury goods.
The campaign, launched by Xi in 2012, has had a dramatic impact on the industry. In 2013, the luxury market in mainland China grew only 2%, down from 7% the year before, according to Bain.
Some fashion brands were shunned because shoppers were looking for less visible logos or designs. People “don’t want to just walk around with big LV anymore,” Patricia Pao, CEO of Pao Principle, a consultant for luxury brands in China, told CNN.
Premium spirits brands, such as baijiu maker Kweichow Moutai, also saw sales drop significantly. The company later said the campaign had put “unprecedented pressure” on the alcohol industry.
The industry continues to face regulatory challenges and has recently been hit by a massive sell-off of stocks.
During the 2012 anti-corruption crusade, posh hotels also suffered, as authorities canceled banquets and conferences. Some five-star hotels at the time even asked to remove a star, in the hopes that the lower ratings would allow them to appear less opulent and retain their clientele, Chinese state media reported.
It doesn’t help that companies ranging from the burgeoning tech sector to private education in China have recently been the target of yet another crackdown, which has spread to the entertainment and live-shopping industries.
Pusz, the UBS analyst, said this may have contributed to some unease.
“Because obviously there was a lot of news in the market about several other industries affected by various Chinese government measures, I think there was a bit of anticipation on the part of people, [like]: “Okay, what if luxury comes next?” “”, She declared.
The times have changed
Some analysts believe, however, that this crackdown could be different.
According to Bain’s latest estimates, buyers in China account for 35% of all luxury goods sales worldwide. By 2025, the firm suggests it could reach nearly 50%.
Bruno Lannes, Shanghai-based Bain’s consumer products and retail practices partner, said his company was not changing its forecast due to the “common prosperity” pledge.
“It’s too early to tell, but there’s no real indication that this is having a major impact, I think, on brands,” he told CNN Business.
Lannes expects the latest policy to have a “neutral” or “positive” effect on luxury consumption, particularly if incomes rise across the country as a result.
“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 driven by the tradition of executives or officials giving or receiving gifts, which was an important target of the campaign, Lannes noted. Now consumption is largely “by people who consume for themselves or for their loved ones,” he said.
However, some consumers may already be starting to curb their spending.
According to LookLook, a consumer research company that works with luxury brands, 1 in 10 respondents to a recent survey of 100 luxury buyers in China cited government crackdown on excessive displays of wealth as the reason they weren’t spending that much these days.
According to LookLook CEO Malinda Sanna, a participant in the study, published in September, said she did not want to “attract unwanted attention.”
“We’ve never heard this before,” she said. “I think the demand is still there, but they are cautious.”
– Laura He contributed to this report.