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China bets on duty free to boost domestic consumption

China’s efforts to lift local consumption, spur domestic tourism and keep within its borders citizens that splurge in Milan or Seoul have spawned a duty-free paradise on the southern island of Hainan that it hopes will satisfy a lust for luxury.

Firms such as the owner of the world’s biggest duty-free shopping centre, China International Travel Service Corp Ltd (CITS), are capitalising on a relaxation of duty-free spending restrictions in February, with HNA Group Co Ltd. reporting a 160 percent surge in sales.

Government initiatives, including 19 more duty-free shops nationwide, come as sales of the types of luxury goods that line duty-free shelves fell 2 percent last year. Market watchers pin the blame on a campaign against demonstrations of wealth among public officials, as well as a slowdown in economic growth.

As things stand, the Chinese buy close to 80 percent of their luxury goods abroad in cities such as Paris, London and Tokyo, Bain Consultancy estimated.

“Whether it is Burberry or Richemont recently, many brands in the space have noted that the future of luxury demand will be about the Chinese and incrementally at home,” said HSBC analyst Erwan Rambourg in Hong Kong, who recommends buying CITS shares.

In Hainan, which is closer to Hanoi than Beijing, duty-free shops offering products priced as much as 30 percent less than the mainland have been operating since 2011, under a trial program aimed at developing the island as a tourist destination.

Customers could initially only buy up to 8,000 yuan ($1,220) worth of duty-free goods, twice a year. From Feb. 1, they have been able to make purchases any time of the year provided the total does not exceed 16,000 yuan. At the same time, stores have also been able to sell goods online for collection at airports.

In Hainan’s provincial capital Haikou in the north of the island, HNA’s duty-free sales have since rocketed.

In the island’s city of Sanya, state-controlled CITS opened the country’s first duty-free shopping centre in 2014. The skylit, flower-shaped edifice is about nine soccer pitches in size and filled with shops stocking over 300 brands including from Burberry Group PLC and Compagnie Financiere Richemont SA, as well as goods such as baby formula.

“It’s definitely much cheaper,” said 20-something handbag shopper Zhang Pei Pei, “But the choice of products is less.”

CITS declined to comment when contacted by Reuters.

Hainan’s balmy climate and over 60 beaches is a draw for developers, with Sanya on the island’s southern tip dotted with luxurious resorts completed or under construction. That city – three times the size of Singapore – has over 1,000 hotels with 30 more due to open in its Haitang Bay area in the coming years.

One of those is the $1.7 billion Alantis project of Chinese conglomerate Fosun International Ltd and the owner of South Africa’s Sun City casino resort, Sol Kerzner.

“Fosun is optimistic in the future development of Sanya,” the company said in an email to Reuters.

Near the capital Haikou, property and aviation conglomerate HNA plans to develop a deep-water port, international sports stadium and motor racing circuit, as well as an artificial isle similar to Dubai’s Palm Islands.

Its aim is to become the country’s first duty-free retail brand, HNA said in emailed comments.

But for all the glamour, there are plenty of Chinese ready to spend holiday money on products that are more or less in reach on a daily basis.

On one weekday afternoon in CITS’ mall, queues snaked out of beauty stores from Chanel SA, Estee Lauder Companies Inc and L’Oreal SA, while the outlets of upmarket watchmakers appeared near-empty.

“I just want to buy cosmetics,” said He, a 30-something from southwestern mainland city of Chongqing, who did not provide her surname. “For other things like bags, I will just take a look.”

In agreement was Huang Cheng, a 26-year-old engineering student from Shanxi province in northern China.

“We don’t really want to buy the big brands,” he said, gesturing to the empty watch shops. “The main reason is just to buy daily necessities.”

Hong Kong-based CLSA analyst Aaron Fischer said the limited number of duty-free zones is unlikely to materially boost domestic spending on luxury goods.

He also said price was not the only reason for shopping outside of China. Buying luxury goods in the country of origin gives “a greater feeling of satisfaction,” he said.

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