Despite Slowdown, the Cult of Luxury Grows in China

How the government's anti-corruption campaign could squelch the Chinese luxury market

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American tweens saw the heyday of the television series Gossip Girl come and go with hardly a backward glance. Not so in China. In 2012, the actors who played Blair Waldorf and Chuck Bass flew to Shanghai for the ribbon-cutting ceremony of luxury jeweler Harry Winston, spurring interest in China for the international diamond boutique; today, Chinese e-commerce websites still loudly advertise pricey clothes as “gossip girl” influenced. 

That’s because Chinese consumers are perhaps more eager than anyone else around the world to latch onto global wealth trends. China is the country with the world’s largest number luxury buyers, accounting for some 29% of the global market. The country’s one million millionaires and more than 120 billionaires are part of a vibrant culture of flashy gift-giving and visible spending, where Scottish tweed suits, pricey handbags, fine French red wines, Chanel perfumes, and Swiss watches swap hands like mahjong tiles.

But China’s love affair with conspicuous consumption may be cooling. China’s consumers are no longer buying gaudy handbags and flashy watches at the same pace that they once did.

China’s richest spent 15% less overall in 2013 than they did in 2012, according to a recent study of Chinese millionaires by the Hurun Report, and 25% less on gifts. A separate study by Bain & Company shows that growth specifically in China’s luxury market has slowed from 7%  in 2012 to around 2% in 2013. The firm forecasts that trend will continue in 2014.

The number of Chinese joining the superrich has slowed as well—the country’s millionaire club only grew 2.9% in 2013, a steep slowdown compared to 2011, when the number of millionaires grew at 9.7%. And overall GDP growth in China was 7.7% in 2013, still high by global standards but hovering barely above the country’s 14-year low.

That’s all meant an overall slowdown in spending on international brands, hurting a number of global luxury companies. Expensive spirits did not fare well last year, with companies like Remy Martin seeing sales of high-end cognac plummet at the end of 2013. Watches, which make up over one-fifth of the total Chinese luxury market, saw an 11% decline in 2013, and men’s brands like Cartier and Montblanc experienced decreases in popularity as well.

Why are China’s superrich suddenly reticent of buying into pomp and panache? President Xi Jinping, who took power in late 2012, is driving a vast anticorruption campaign from Beijing. Eighteen prominent officials were investigated for corruption in 2013, compared with an average of 5.8 probes in the years before. Bans on cigarettes and upscale liquors at official receptions, as well as public scrutiny are suppressing the country’s graft-by-gift-giving culture. Government officials who flaunt flashy watches beside wives with gaudy Goyard handbags are lambasted on social media websites and in the press.

“The effect has been that the rich have made much more subtle choices. They’ll take off their watch before they go up for a photo-shoot,” said Sage Brennan, an expert on luxury marketing in China and founder of the consulting group China Luxury Advisors.  “But then people will try to identify the shape of the tan-line on their wrist.”

A mid-level Chinese safety official, Yang Dacai was photographed at the scene of a deadly bus accident in Shanxi Province in 2012 wearing watches several times more expensive than his $15,000 salary. Outraged Chinese blogdom nicknamed him “Brother Watch,” and he was sentenced in September 2013 to 14 years in prison for corruption. It was a stern lesson to high-flying Chinese administrators, who often grease the wheels of business deals with under-the-table gifts.

“Everyone’s trying to weather the storm in Chinese officialdom,” Brennan added. “A lot of government officials boxed up some of those Chanel purses that were very obviously Chanel or Gucci and sent them here to their kids who are studying in the United States.”

But the crackdown hasn’t entirely discouraged spending, and the Chinese are figuring out new ways to spend. Chinese consumers are now purchasing more luxury goods abroad, traveling to New York and Paris to buy handbags and pens, buying more than 60% of their luxury goods outside of the country. (In 2012, they were already far and away the world’s largest international tourism spenders, dishing out a total of $102 billion.) And they’re buying fewer flashy goods at home. Women, who are not as often in the discerning public eye, are buying goods at accelerating rates, with cosmetics and women’s apparel sales up 10% in 2013.

“There is a paradox at the heart of the Chinese entrepreneur,” the chief researcher for the Hurun Report, Rupert Hoogewerf said in the study. “On the one hand they want to stay discreet, and on the other hand, they are currently buying more Rolls-Royces and luxury watches than any other nation.”

China’s luxury market is still a hot target. Fashion icons like Coco Chanel and Elizabeth Taylor have an outsized influence in the country, and any brand associated with a celebrity gets immediate buzz in China’s active social media sphere, says Brennan. “A lot of the cachet comes from the value that’s inherent in these products because of the brand,” said Brennan, “and some of the people who have inspired these brands are famous.”