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Where Do China’s Luxury Purchases End Up? The Answer May Not Be As Clear As Black or White.

Joel on November 15, 2010 - 9:47 pm in Archive, Consumer Intelligence

China is the world’s second largest luxury goods consumer market. All it takes is one visit to Shanghai, and even an inexperienced visitor will feel that he or she has arrived at the epicenter of Chinese luxury purchasing. Yet, most China consumer observers agree that the majority of luxury consumption happens outside of the so-called tier-1 cities of Shanghai and Beijing. As I write this post from Hangzhou, a picturesque second-tier city in China’s Zhejiang province, there is evidence all around me to prove this. Granted, Hangzhou is not your typical ‘second-tier city’, as it is a popular second home to China’s wealthy from across the country. However, the amount of wealth and the rate of urbanization here is truly astounding. A walk on the streets surrounding West Lake leads past luxury car dealerships for Porsche, Maserati, Ferrari and Aston Martin.

A short cab ride outside the city center, a new wealthy business district is emerging in Binjiang district, an area that up until the past few years was a small farming community. To accommodate the employees of Alibaba, Netease and Geely, three leading Chinese companies that are already headquartered there, developers are racing to build high-end apartments and condominiums like the Hyatt luxury residences.

It is undeniable that there is a tremendous amount of wealth emerging in newly-urbanizing areas like Binjiang, but where ultimately does all of this wealth go? Do all of the luxury purchases – all of the Porsches, Louis Vuitton handbags, Omega watches –  remain with the initial buyers? According to Professor Wang Xiaolu of the China Reform Foundation, this is definitely not the case. In a recent study, Professor Wang takes a deep look at China’s so-called grey market – a market that he estimates represents almost RMB10 trillion in hidden income – the equivalent of 30% of China’s GDP.

One ‘grey area’ that struck me was the following excerpt in which he discusses a new market for luxury purchases:

“Another “emerging industry” that reflects the expanding trend of grey income is the gift purchase industry. In Chinese cities, an increasing number of companies are in the business of buying luxury cigarettes, wine, medicine, gold and silver accessories, and gift coupons at a discount. Buying luxury products or consumer coupons at high prices and selling them at low prices seems unreasonable. There’s only one explanation for this strange phenomenon, i.e., many have received such items as gifts and sell them for cash at a discount. A key reason for such a rampant gift-giving culture is that it is a safer form of corruption, compared with the direct exchange of cash.”

It is interesting to observe the varying motivations for luxury consumer purchases in contemporary China. While most agree that the newly affluent make some such purchases to demonstrate to others around them that they have ‘made it’, others view the same items as safer alternatives to hongbao (red envelopes stuffed with pay-off cash). We will have to wait and see what other forms of luxury consumer behavior develop as China chases Japan to attain the number one spot on the list of global luxury consumer markets. Let’s just hope that future trends are driven out of personal consumer preferences rather than as a mechanism for corruption.

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4 Comments
  • November 19, 2010

    Very interesting post ( as usual!). I just had a couple of remarks.
    You mention that “the majority of luxury consumption happens outside of the so-called tier-1 cities of Shanghai and Beijing” and to support that you link to our interview to Vinay Dixit from McKinsey. When I read that interview I can’t find the same assessment. He rather talks about a shift from “tier-city” approach to “City-cluster” which he describes as a geographical area around the city which consistent characteristics. This, from my point of view, would still include the 1st tier cities.
    And a second comment, just to add some extra info on the topic. I am also currently reading a book entitled “Luxury China” by M. Chevalier & P. Lu. They say that, when it comes to the luxury market growth, a more important group (rather than the very rich) are the affluent. And 21% of those are in Shanghai (far from the 2nd position that Beijing has with 10%- as per data from a joint study conducted by Mastercard and HSBC)

    Reply
  • November 21, 2010

    Clara, Thank you for your great comment. I appreciate you pointing out that the McKinsey Interview link should have referred to Part II of the interview with Vinay Dixit. I have not had a chance to read “Luxury China,” nor have I conducted as significant primary research into China’s luxury market as Pierre Xiao Lu; however, I find it hard to imagine that Shanghai will remain the epicenter for luxury consumption in China.

    Regardless of what label is assigned to a particular group of Chinese consumers, I feel that the overall growth of consumers in China who can afford luxury goods is expanding. I believe this group of consumers is not limited solely to tier-1 cities like Shanghai and Beijing, and this is a trend that will only continue with time as more wealth spreads to inland provinces as a result of the government’s current push for increased economic development in these regions.

    Reply
  • December 1, 2010

    The wealthy in the areas other than tier-1 cities hold a different consumption preference. They spent much more on buying house, cars, and all other traditional commonidities. The reason for this is that this group of rich people is not as much educated as those wealthy in tier-1 cities. However, the contrast in terms of product category between traditional luxury goods and trendy luxury goods is becoming more and more indistinctive.

    Jack Li
    Reply
  • December 23, 2010

    Interesting post, Joel. It seems that if China wants to take over and maintain the number one spot on the list of global luxury consumer markets, they would need to alter their motivations. Their black hat tactics may work for a while in improving their status, but I would think it would be very difficult to maintain. It will be interesting to watch and see what happens.

    Reply
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