RAPAPORT... The decision by the Chinese authorities to clamp down on advertising luxury products is a red flag for the diamond industry. While China represents the primary growth opportunity for the trade, the government’s restrictions are presenting hurdles even if its intentions may be pure.
Earlier in February, just before the all-important Chinese New Year Spring festival, the Chinese authorities enacted a ban on promoting luxury products as gifts for leaders on the country’s official state radio and television channels. In particular, the restrictions applied to costly watches, liquor, gold coins and the like.
By doing so, the authorities are sending a worrying message to the market. Is this the first of other interventions to curb luxury spending by the new leadership?
The move is aimed at stopping corruption through elaborate gift-giving to officials. Some reports suggest it is also an attempt to ease the growing social frustration at the wealth gap between rich and poor.
China has tried to downplay the luxury sector in the past by placing restrictions on advertisements promoting lavish lifestyles. It is clearly conscious of its social gaps, as it should be. While official data shows the Gini coefficient – the core measure of income disparity – at 0.48 in 2010, a recent survey by Southwestern University of Finance and Economics in Chengdu indicated that the more accurate reading should have been around an alarming 0.61 – the higher reading showing the greater disparity.
Both the corruption and income gap concerns are real and may present a tremendous challenge to the country’s new leadership. Its fight against corruption should therefore be supported and attempts to narrow societal inequalities encouraged.
But the country should aim to lift the income of the people with lower earnings rather than stifle spending of the higher-end earners. Tackling these problems by attempting to curb consumption is misguided, especially in the current economic environment. It is even more difficult to comprehend given China’s focus on transitioning from an investment and export- driven economy to one driven by consumption.
Investors expressed their concern as share prices of Burberry, LVMH, Richemont and Chow Tai Fook all fell following the announcement. Consumers have shown similar caution. China’s Ministry of Commerce reported that retail store and restaurant sales during this past Golden Week rose 14.7 percent year on year, representing its slowest growth since 2009. Encouragingly, gold, silver and jewelry sales outpaced other categories registering growth of 38.1 percent over Golden Week last year, spurred by the overlap of Valentine’s Day, according to the ministry.
Despite the jewelry numbers, the festival indicated that China is still as cautious in 2013 as it was in 2012, which is understandable given the country’s current position. Many see it at a crossroads, given not only the current political leadership transition that occurs once every ten years, but also in its economic development. The aggressive double-digit economic growth seen in the past decade was always going to prove unsustainable as the economy matures and the country develops.
But, as the government acknowledges, there are new growth stimuli on the horizon, most notably in consumer spending. With the growth of China’s middle class, local consumption will inevitably drive the economy. The authorities need to gear up for this. They must be seen to be encouraging spending.
One obvious avenue would be to lower the import duties and taxations on luxury products to embolden consumers to buy locally. Some estimate that the respective tariffs add between 30 percent and 50 percent to the price of certain items. It is little wonder that scores of Chinese nationals choose to make their purchases abroad. Consumers should be up in arms and the debate has resurfaced in the media following this past Golden Week regarding the country’s high duties. It is outrageous that they should make such lavish shopping trips overseas to make their purchases because it’s cheaper to buy Louis Vuitton and Prada in Hong Kong, Paris or New York, than it is in Shanghai.
The Chinese travel bug has evolved into being more than just vacationing. More are planning their trips with shopping in mind. Researchers at Bain & Company estimate that while the Chinese bought about 25 percent of the world’s luxury goods in 2012, some 60 percent was purchased abroad. The report estimated that Chinese consumers now make half of the luxury purchases in all of Asia, and nearly one third of those in Europe.
China cannot hide its penchant for luxury products and neither should it. The more it can encourage some of that spending to return to the Mainland, the better it is for the economy, and the more it helps to inevitably alleviate the income divide.
Similarly, corruption should be dealt with at its core, by clamping down on those officials accepting such “gifts” rather than via superficial advertising restrictions. Besides, Bain noted a growing need for luxury brands to focus on specific tastes and consumer preferences as less than 25 percent of luxury spend is now dedicated to personal and business gifts. Ultimately, the market aligns itself.
These trends are especially sensitive for the diamond industry, which has pinned such heavy hope on China’s consumption growth. Indeed, any recent talk of an industry-led generic advertising campaign has targeted China as the initial focus. Of course it has no choice – China holds the greatest potential as a long-term growth engine for the industry.
But for many in the trade, China appears aloof and difficult to penetrate, requiring carefully nurtured partnerships with local players to ensure success. And the more limitations put in place, the more removed the country becomes.
Even if the latest round of advertising restrictions were in practical terms marginal, they send a negative message to the diamond industry, as it does the rest of the luxury market. For as much as the trade is ready to embrace China, it may prove difficult if China is not yet ready to fully welcome the trade. Let’s hope the recent advertising restrictions were indeed a one-off attempt to curb corruption and not indicative of a general effort to restrain luxury spending.
The writer can be contacted at avi@diamonds.net.
Follow Avi on Twitter: @AviKrawitz
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