President Xi Jinping’s promise to redistribute wealth brings back bad memories of luxury brands in China | News Today

But experts haven’t ruled out the possibility that the government will crack down on signs of perceived extravagance or raise taxes for the wealthy, 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 “common prosperity” pledge. “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 renewed concerns from China, “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 stakes were 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 “regulate excessively high incomes in a reasonable manner 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.

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.

The industry continues to face regulatory challenges and has recently been hit by a massive sell-off of stocks.

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,

The times have changed

Some analysts, however, believe this crackdown might be different.

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, which was published in September, cited the desire not 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.