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