China’s frugal New Year celebrations are bad news for luxury retailers

The sort of luxury campaign that China has purged.
The sort of luxury campaign that China has purged.
Image: AP Photo/Ng Han Guan
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For a successful Chinese businessman, there used to be nothing like taking dozens of government officials out for a pre-Lunar New Year holiday banquet to show them a taste of the largesse they could expect in the coming year.

But now China’s incoming president Xi Jinping has vowed to crack down on corruption, businessmen and the officials that used to depend on them are shying away from such visible displays of wealth.

According to the China Cuisine Association, 60% of nearly 100 restaurants it surveyed reported bookings were cancelled in the weeks leading up to the holiday. “Our corporate customers are seriously complying with the party’s order to cut spending on meals,” one Shanghai restauranteur told the South China Morning Post (paywall).

“The expensive business dinners will decline amid the anti-corruption drive,” Kang Jie, the chief executive of Chinese restaurant chain Xiao Nan Guo also told the Hong Kong newspaper.

Macro-economic data shows that, thanks to an explosion in easy-credit, China’s economy is recovering from the doldrums it found itself in halfway through last year.

But the bad restaurant takings tally with news that luxury firms such as Swiss watchmaker Compagnie Financiere Richemont and carmaker Daimler are struggling in China.

To show it is serious about combating corruption, the Chinese government has also banned television advertisements for luxury goods.

If China’s wealthy continue safeguarding their wallets, that will be extremely bad for retailers and private equity funds who are betting big on the rise of the Chinese consumer. The average Chinese household is extremely frugal, and household spending makes up a relatively small 34% of the nation’s GDP. The nation also has such severe wealth inequality it is often observed it does not really have a middle class.

So when global retailers talk about the glowing potential of China, they are likely referring to the so called “baofa hu” (a phrase for the nouveau riche that translates loosely as “exploding with new money”) the big-spending businessmen and officials who used to think nothing of showing off their luxury watches.

Quartz noted that this group was starting to hunker down back in October. The trend could last a while. In China, the phrase “corruption crackdown” if often interpreted to mean that a new set of powerful politicians plans to use graft convictions as a convenient way to purge enemies. Fear of being targeted may be why money is flowing out (paywall) of China and government officials are dumping luxury properties they own domestically and switching their cash into real estate in offshore havens such as the Cayman Islands. Xi Jinping does not officially start his new job until next month. After that, wealthy Chinese businessmen and politicians may have to wait a few months to find out if they are in the firing line or in the clear. Luxury goods retailers dependent on China could have some time to wait, then, before their fortunes reverse.