Even with a corruption crackdown, Chinese luxury spending is still healthy

“Moutai no good? How about a Zegna coat?”
“Moutai no good? How about a Zegna coat?”
Image: AP Photo / Alexander F. Yuan
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Never fear, luxury retailers, China’s crackdown on lavish government spending hasn’t erased the country’s appetite for the high-end.

Investors and retailers worried that a government campaign to root out corruption would weaken a booming luxury market. How then to explain today’s news: Italian fashion house Ermenegildo Zegna said Chinese demand rebounded in the fourth quarter and British luxury brand Burberry beat forecasts, with double-digit underlying sales growth in Hong Kong and China.

Corruption aside, China’s demand is being driven by shoppers buying for themselves, but also for others as part of China’s entrenched “gifting” culture where business deals and other transactions almost always necessitate gifts of expensive liquor, cigarettes, watches and other items to officials and business heads. A quarter of all luxury purchases are for gifting, according to the consultancy firm Bain. As much as 60% of luxury watches in the country are gifted to officials, according to Franck Giacobini of the luxury watchmaker A. Lange & Söhne.

So far investors have paid heed to pledges by incoming Chinese leader Xi Jinping to change all that. We’ve reported how China’s favorite high-end liquor Moutai’s share price declined dramatically as Xi banned red-carpet receptions and boozy military banquets. Investors have said high-end cigarettes, watchmakers and upper-end department stores are also likely to be hurt in the so-called corruption crackdown. Both Zegna and Burberry reported weak gains in China last September amid uncertainty in November when the new leaders were unveiled.

Now it appears some of the dust is settling. In March, China’s leadership transition will be completed as Xi and other officials officially take their posts. This should set the backdrop for a recovery in gifting, Credit Suisse analyst Rogerio Fujimori said last week, although gifting may be more modest than in the past.

Meanwhile, tastes are changing. Some consumers are eschewing the conspicuous. According to the Hurun Chinese Luxury Consumer Survey 2013, Moutai, which can cost up to ¥1 million ($160,635), fell from fifth place on a list of most popular gifts to 13th. Expensive watches, previously very popular with Chinese officials as bloggers have noted, also took a hit. Only one luxury watchmaker, Switzerland’s Longines, made the list.

But it’s not all over for conspicuous Chinese consumption. Zegna said that smaller cities have outperformed Beijing and Shanghai.  Demand is picking up from China’s lower-tier cities, home to much of the country’s expanding middle class.