International

The Worst May Be Over for Luxury Goods in China

BYScott Cendrowski
December 7, 2015, 8:47 AM UTC

Ritz-Carlton, Hong Kong

Opened March 2011 It's a tall order, so to speak, but Ritz-Carlton has done it: The Ritz-Carlton Hong Kong, rising from the 102nd to 118th floor of the International Commerce Centre and dominating the city skyline with sweeping views of Victoria Harbour, is officially the world's tallest hotel. And the service is just as lofty: With 312 state-of-the-art rooms, the property features six restaurants and an alfresco rooftop lounge, complete with fire pits, that measures 1,600 feet above sea level. Ritz-Carlton is zeroing in on Asia as a key market for expansion: The luxury chain has recently opened properties in Okinawa, Japan, and Shanghai; an additional 13 properties are planned for Bali, Vietnam, India, Japan, and China -- where eight more hotels are on the drawing board -- by 2017. From $870

Is the worst over for the luxury companies suffering from the clampdown in gift giving amid China’s three-year anti-corruption campaign?

One respected researcher is calling a bottom.

The recent rebound in sales of jewelry, catering for gala banquets, and Maotai, a high-end brand of China’s favorite liquor, is proof the worst of the campaign’s effects, ongoing since 2012, is over, says Capital Economics’ China economist Chang Liu in London.

The level of spending still sits at or below what it was three years ago—not exactly proof of an exciting growth story. “But with few new rules introduced in 2015, the campaign is no longer causing additional cutbacks in spending,” Liu wrote in a report Friday.

Retail luxury sales are rebounding in China. Courtesy of Capital Economics.

While Macao’s casinos and some European luxury brands like those owned by LVMH continue posting declining sales, Liu notes the pace of decline shows signs of easing.

If true, it should give hope to those luxury goods makers once caught in the nets of China’s crackdown.

There’s other evidence that the deep luxury freeze is thawing.

In March, the Chinese version of the Financial Times released a survey showing the budgets of “entry-level” luxury buyers rose 48% year over year, even though the high-level buyers’ budget continued fell 20%. Maybe reflecting the ongoing overhang of the anti-corruption campaign, the first choice among buying options was having friends or relatives bring back goods from overseas. The U.S. ranked second behind Hong Kong as the favorite spot for shopping.

The new about luxury sales rebounding is not just isolated good news for luxury brands.

Capital Economics estimates the anti-corruption campaign, which has been linked to local officials sitting on project approvals for fear of the appearance of impropriety, reduced GDP growth in both 2013 and 2014 by one full percentage point.

If the worst of the anti-corruption campaign is over, that economic drag should be a thing of the past, just in time for China to face its bigger problem of an industrial recession and unsustainable debt threatening to drag the entire economy into disarray.