How will China’s new leadership impact the wealthy

Shanghai – IFC Mall, Pudong

According to the latest report by Boston Consulting Group (BCG) on China, the number of wealthy will almost double by 2020, sustaining a 75% growth of the country’s luxury market. Between 2010 and 2020, the Chinese wealthy segment will grow from 6% to 21% of the entire population, the highest and most significant among all other emerging markets such as India, Russia and Brazil.

The BCG report indicates that over 120 million Chinese earn more than US$ 40.000 per household, but also for many of them over US$ 200.000. Driven by social pressure to show off their status, China’s rich are striving to be ahead of trends, with an increasingly refined taste for luxury. These wealthy Chinese will count 280 million individuals from 2020, making up for almost 5% of global luxury consumption. From 2020, according to BCG, China will represent 40% of the global luxury market.

The luxury sectors with the highest growth rate are: cosmetics, apparel and cars. If in 2011, China had over 700.000 households with annual earnings of over US$ 250.000, the number of such households will double by 2015, reaching 1,5 million. An important mention is the fact that in 2005, over 70% of these nouveaux riches did not exist. According to BCG’s research, China will become the world’s leading luxury market, representing 23% of global luxury sales which are estimated to reach 298 billion euros.

But although China boasts the second largest economy in the world, it only ranks 89th internationally in terms of GDP per capita, with over 100 million of its population living under the poverty line. The growing wealth gap, the rampant corruption and bureaucracy, the poor social security system and the growing environmental issues have been addressed as ”severe challenges” by Xi Jinping, China’s new leader, appointed today with the occasion of 18th Congress of the Chinese Communist Party which took place earlier this week in Beijing. “Our people… yearn for better education, stable jobs, more satisfactory income, greater social security, improved medical and healthcare,” he said.  With an empahsis on reform within the Chinese Communist Party as one of his top priorities, Xi Jinping warned “the problems among party members and cadres of corruption, taking bribes, being out of touch with the people, undue emphasis on formalities and bureaucracy must be addressed with great efforts”.

Although some have linked a crack down on corruption with the slow down in China’s luxury market in the past 6 months, it is to early to anticipate to what extent the reforms of China’s new leadership will have any impact on the wealthy. Most importantly, it remains to be seen how the new leaders will succeed in implement a pension system to share the wealth, improving the lives of the average Chinese and, at the same time, how they will manage to switch China’s export driven economy to an economy of consumption, in the context of the double digit recession in Europe and a frail U.S. economy.

Among the potential measures which could negatively impact China’s luxury market are: increased import duties on luxury goods, increased income taxation, restriction on ownership of certain luxury goods (value, number) - measure which could all inhibit spending locally and drive shopping abroad. Already, an increasingly number of wealthy Chinese are shopping abroad, especially because of lower prices on luxury branded goods. Louis Vuitton has already taken the measure of increasing prices in Europe by 8 percent and major other luxury brands could follow suit.

Oliver Petcu in Shanghai