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The luxury industry lost 70 billion dollars after China said it will adjust excessive income

By Don-Alvin Adegeest

27 Aug 2021

Business

Image: Pexels

China, long expected to be the world’s largest consumer of luxury goods, may have a different future after all. The country, which last year saw sales of luxury rise 48 percent to about 54 billion dollars, said it wants to adjust excessive incomes and see its national wealth more equally distributed. China currently has one of the world’s largest gaps between rich and poor, which its government is determined to not widen.

The news came ahead of the 20th National Party Congress, where President Xi Jinping added “common prosperity” to his agenda. The news sent the luxury stock market plunging, with LVMH seeing its stock fall by nearly 10 percent. It simultaneous nudged investor and LVMH CEO Bernard Arnault up to third place on Forbes global rich list.

Other brands suffered too. Kering’s stock fell 9.47 percent, with Richemont and Burberry seeing similar losses of 6.6 percent and 5.51 percent respectively.

An analysis by Jing Daily states the long-term effects of eradicating poverty will boost Chinese consumption and promote economic growth, however, it is unclear what defines “unreasonable income” and what the consequences will be for the upper-classes and uber wealthy who and how they will be taxed.

Jing Daily offered a comparison: “In 1991, the US tried a similar approach when President George H. W. Bush added luxury taxes to expensive goods like yachts, private jet planes, jewelry, and cars to ease the country’s budget deficit. But the policy remained tainted because of the disastrous impact on various industries,” including job losses and profit adjustments.

Throughout the pandemic Chinese customers have continued buying Europe’s luxury brands, hence why investors are on red alert. China’s growing middle classes have fuelled much of luxury’s growth, with “luxury demand more likely correlated to wealthy consumers’ psychology more than just to financial means,” said HSBC in a response to China’s agenda.

When referring to income inequality “luxury demand doesn’t just come from bubbles here and there but from Gini coefficient type disparities,” HSBC said. “A good example of that has been the K-shaped [pandemic] recovery in the US where wealthy individuals benefited from the stock market, secondary home markets and ‘staycationing’ and had more means to spend and did just that.”

60 billion euros wiped off the value of European luxury stocks

Eradicating poverty should be a goal of every government, but taxing wealth-redistribution is potentially bad news for the luxury industry, said the Wall Street Journal. “A small group of very wealthy individuals—numbering only 110,000, according to Jefferies estimates—generates around a quarter of all luxury sales to the Chinese, who are now the industry’s most important shoppers by nationality. The risk of higher taxes and party disapproval may curb these big spenders.”

Chinese tech giants are feeling similar reverberations, losing 50 billion dollars of collective value with newly proposed anti-competition behaviours.

Data from Bain and Altagamma show China has been on track to be the world’s largest luxury market by 2025. But, as Luca Solca, senior research analyst for luxury goods at Bernstein, said to Jing Daily. “If the Chinese sneeze, the luxury sector gets pneumonia.”