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Income equality in China today is at a record high level, with the wealthiest 20 percent earning more than 10 times the amount of the poorest 20 percent.

CHINESE GOVERNMENT PLAN TO ADDRESS INCOME INEQUALITY SENDS SHOCK WAVES THROUGH LUXURY PRODUCT SECTOR

 

A speech by Chinese President Xi Jinping about prospective government action to combat the problem of income inequality in the country has put luxury marketers on edge, and precipitated a selloff of stocks of several of the world’s largest luxury brand houses, including LVMH, Kering, Richemont, Prada, Hermès and Moncler.

Xi was speaking at meeting of the Communist Party’s Central Committee for Financial and Economic Affairs on August 17, 2021, where his government presented proposals for strengthening the regulation and adjustment of high income, protecting legal income, reasonably adjusting excessive income, and encouraging high-income groups and enterprises to give back to society.

Income equality in China today is at a record high level, with the wealthiest 20 percent earning more than 10 times the amount of the poorest 20 percent. A report by Credit Suisse indicated that the wealthiest 1 percent of Chinese hold 31 percent of the total wealth in the country, which is 21 percent more than what they held two decades ago.

So as to prevent political dissent from bubbling to the surface, the Chinese president is hinting that concrete action may be taken to limit excessive spending and ostentatious consumption by the country’s wealthy.

But he is not suggesting a return to doctrinaire Maoist communism. The policies being discussed appear designed to expand the size of the middle-income, grow incomes for poorer Chinese, and prohibit illicit income.

More specifically, experts expect to more taxes on property and inheritance, capital gains taxes, the enhancing social security. China currently does not have an inheritance tax.

XI’S SPEECH LEADS TO SELLOFF OF LUXURY SHARES

Three days after the Chinese president addressed the Central Committee for Financial and Economic Affairs, shares in luxury goods companies like LVMH, Kering and Hermès International had fallen in value by about 14 percent.

In just over two days, the selloff of shares wiped 60 billion euros, or $70.26 billion, from the market value of Europe’s big four brand houses, LVMH Moët Hennessy Louis Vuitton , Kering, Hermès and Richemont.

Almost all of Europe’s largest luxury groups are widely exposed in China. The Swatch Group, for example, reports that about half of its sales came from Chinese consumers. The figure is about 40 percent for Burberry and Richemont, 35 percent for Hermès, 33 percent for Kering, and 31 percent for LVMH.

The fall in the share prices was so significant that it led to a fall in status of LVMH’s chief executive Bernard Arnault, who slipped on the Forbes list of the world’s richest individuals to  number 3, behind electric car and space company owner Elon Musk.

During the first quarter of 2021, LVMH’s sales in Asia, excluding Japan, were 86 percent higher during the first quarter of 2021. Most of the additional demand came from China.

THE COUNTRY THAT KEPT THE MARKETS AFLOAT

In 2020, it was China that kept the luxury markets afloat amid the ravages of the COVID 19 pandemic.

According to the consultancy house Bain & Co., the Chinese luxury market grew to be worth $52.9 billion, and mainland China’s overall share of the global industry rose from 11 percent in 2019 to 20 percent a year later.

Speaking on August 17, 2021, to the Chinese Communist Party’s Central Committee for Financial and Economic Affairs, the country’s president, Xi Jinping, alluded to prospective government action to combat the problem of income inequality.

“The appetite of China and Chinese nationals for luxury remains insatiable and all customer nationalities are positively growing or on a recovery path,” wrote Bain in a report released in May of this year, while “growth of the online channel remains robust” – in China and beyond – “as new clients buy luxury online for the first time, and the range of prices is widening, with more entry-level products but also more high-end items.”

It was the big brand names that were getting much of the business. According to the Wall Street Journal, the China unit of LVMH experienced 65 percent growth year-over-year in the second quarter of 2020, while Kering SA, recorded a 40 percent increase. Global revenue for the two luxury brand giants in the second quarter of the year respectively fell 38 percent and 43.7 percent.

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