Consumers cutback, companies lower forecasts as the government attempts to curb official expenses.
Sluggish growth in the world's second largest economy is having a visible impact on its booming luxury sector, causing foreign and domestic luxury brands to adjust yearly forecasts. While consumer purchasing is likely to slow as a result of the global slowdown, a new government ban on luxury spending may deal the biggest blow to the sector.
Last year, Chinese officials spent more on vehicles, dining and travelling abroad than they did on policing the state. According to the party's news outlet, China Central Television (CCTV officials spent 408.5 billion yuan ($64 billion) on vehicular expenses, 200 billion yuan ($31 billion) on dining, and 300 billion yuan ($47 billion) on travelling abroad, compared to just 700 billion ($110) on policing.
The new restrictions will become effective on October 1st, coinciding with the week-long annual celebration of the founding of the PRC, and will cap official spending on the “three publics” of cars, dining and travel.
According to retail consultant Corbett Wall, lower government spending is likely to affect the luxury retail market and he claims “a lot of goods sold in luxury stores are meant for gifting from officials to other officials or to businesses. Whenever there's a big government meeting, those stores in Beijing get busy.”
Wenzhou, the most prominent city to fight against conspicuous consumption, has already sold a portion of its official fleet and has capped dining at 60 yuan ($9.4) per person per meal. Vehicle purchases in Wenzhou cooling as a result of the slowdown in luxury spending, with purchase taxes down 21% to 545 million yuan ($85.5 million) in the first sixth months of the year.
High-end fashion and jewellery stores have also been adjusting to the slowdown. Chow Tai Fook, the world's largest jewellery maker, saw shares tumble in May as Hong Kong retail sales reached their slowest growth since February 2011. Shares in Burberry and Prada have also seen a drop in share prices as consumers cut back during this period of slower economic growth. However, some luxury car makers appear to still be cashing in on the Chinese taste for the good life on the road.