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Business trends

Where to spend it: Chinese luxury buying moves closer to home

Tax cuts help high-end brands extend reach despite economic slowdown

The Plaza 66 shopping mall in Shanghai counts global luxury brands among its tenants. (Photo courtesy of Hang Lung Properties)

HONG KONG -- A slowing Chinese economy does not seem to have stopped consumers from buying luxury goods, but they are increasingly spending their money not in upscale boutiques overseas but at local shopping malls.

LVMH -- the world's largest purveyor of luxury goods, with brands like Louis Vuitton and Hennessy -- saw sales growth accelerate in China during the last three months of 2018, even as economic growth dropped to the lowest annual pace in 28 years.

Longtime shopping mall operator Hang Lung Properties, meanwhile, says it is leasing shops to more luxury brands looking to expand their presence in China despite overall weakness in consumer spending.

While some may scratch their heads at this, industry insiders point to a slew of stimulus measures, including tax cuts, that have eased the pain of a decelerating economy.

"A lot of policies [Beijing] just implemented are very favorable for domestic consumption," Weber Lo, Hang Lung's chief executive, said at an earnings briefing here on Wednesday. The Hong Kong-based developer runs upscale shopping malls in tier-one and -two cities on the mainland, including the Shanghai landmark Plaza 66.

Lo said tenants including Chanel, Dior, Giorgio Armani, and Givenchy sold more in the second half of 2018 than in the first six months.

Since last year, European brands including Louis Vuitton and Hermes have lowered retail prices in China in some categories, after authorities cut import tariffs on a range of consumer goods as part of Beijing's effort to encourage domestic consumption.

For imported clothing alone, the average tax rate was lowered to 7.1% from 15.9% in July, according to the Customs Tariff Commission of the State Council.

While Chinese buy roughly one-third of the world's luxury goods, about 75% of this consumption occurs outside the country, according to estimates from Boston-based consultancy Bain & Co., owing to the high tax rates at home. Mainland Chinese spent over $115 billion during more than 130 million overseas trips in 2017.

Now, as the U.S.-China trade war threatens Chinese exports, the government has grown more determined to bring consumption home.

In addition to cutting taxes, Beijing has also been applying tighter border checks for undeclared luxury goods since October. Chinese travelers bringing in big-ticket items from overseas face tax payments or even legal trouble when they return home.

While this crackdown is aimed at daigou -- professional shoppers who buy tax-free goods overseas and resell them domestically at a profit -- big-spending travelers could also be affected.

Beijing's carrot-and-stick approach to driving domestic consumption, however, is beginning to take a toll on luxury brands' sales outside the mainland. Sales-tax-free Hong Kong, which received more than 60 million Chinese visitors in 2018, is feeling the effect.

"There was sustained business with our Chinese customers in the fourth quarter for [Louis] Vuitton, more so in mainland China, less so in the more touristic regions," LVMH CEO Jean-Jacques Guiony said on an earnings call on Tuesday.

Sales growth for jewelry, watches, and valuable gifts fell 4.9% year on year in December, while consumer durable goods decreased 9.3%, according to figures released Wednesday by Hong Kong's Census and Statistics Department.

Annie Yau Tse, who chairs the 9,000-member Hong Kong Retail Management Association, blamed the weak Chinese yuan for the declines.

"We think the depreciation of the Chinese yuan has dampened Chinese visitors' appetite for buying big-ticket items in Hong Kong," Tse said on a conference call Thursday. The yuan will remain weak until the U.S. and China settle their trade dispute, she said.

Not all big-ticket shopping has been immune to the economic slowdown.

Chinese e-commerce leader Alibaba Group Holding saw slower growth in appliance sales during the October-December quarter due to a cooling property market, according to group CEO Daniel Zhang Yong.

But it appears that Chinese consumers are still willing to treat themselves, as sales of advanced lifestyle goods, such as electronic beauty devices, on Alibaba's marketplaces grew faster from previous quarters. Zhang attributed this to Chinese consumers continued desire "to upgrade their lifestyle."

Nikkei staff writer Coco Liu contributed to this report.

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