Demand for luxury goods in China is showing signs of growth for the first time since President Xi Jinping embarked on an austerity and anti-corruption campaign in 2013.
After adjusting for exchange rate fluctuations, China's personal luxury goods market grew by 4% in 2016, according to the Bain Luxury Study, published in December by Bain & Co., a U.S.-based management consulting group.
"Beyond personal luxury goods, Chinese consumers increased their spending in categories such as luxury cars, fine food, luxury hospitality and designer furniture, while holding steady in fine art, private jets, yachts and luxury cruises," Bain said. Chinese luxury spending failed to increase only in the fine wines and spirits segment.
Luxury brand holding companies, such as France's LVMH, Hermes and Kering groups, also reported significant sales increases in 2016.
Kering, which owns brands such as Gucci, Saint Laurent and Stella McCartney, said sales rose by 11% in Asia excluding Japan, led by a rebound in China.
LVMH, the owner of the Louis Vuitton and Moet Hennessy brands, reported a 5% increase in revenues in the region, which accounted for 26% of the group's total revenues. Hermes, which owns brands such as Birkin and Kelly leather handbags, said sales rose by 7%. "We've really seen a recovery of China," Hermes chief executive Axel Dumas said in April.
Some commentators have concluded that luxury sales are rising again because of an easing of Xi's anti-graft campaign, which has led to a fall in the volume of expensive gifts to being offered to government officials and their families.
However, the reality is that while the anti-corruption campaign continues, luxury consumption is being driven by the growth of China's middle class population, which has increased by about 600,000 people a year for the last 15 years. This long-term driver of demand has been exacerbated in the last year by changes in taxes and exchange rates that have made local purchases more competitive with buying overseas.
Although the prices of most luxury goods remain higher in China than in much of the rest of the world, the gap has shrunk significantly because of cuts in taxes on some products and adjustments of Chinese prices by global brands seeking to narrow regional pricing differences.
A recent report by Fortune Character, a Shanghai-based management consultancy focused on wealthy individuals, said the average price gap has fallen from 68% in 2011 to just 16% in 2017. This sharp contraction has resulted in more local consumption and a fall in overseas purchases.
Furthermore, booming real estate prices in major cities throughout China have given millions of citizens a feeling of growing wealth, which has increased their confidence in their future prospects and helped to make them willing to spend more on luxury items.
China has also reinforced controls on personal imports of luxury goods by tourists returning from overseas -- in particular watches and handbags. Systematic X-ray scrutiny of passengers' luggage at borders discourages tourists from excessive purchases overseas. This has put a cap on the practice of "daigou," or buying on behalf of a third-party for a fee.
A devaluation of the yuan has reinforced these trends, making overseas purchases more expensive while encouraging local consumption. The Chinese currency declined by 6.7% against the dollar in the calendar year to the end of December 2016. On May 31, 2017, the yuan was down 12.7% from its level in January 2014.
Consumers are also finding it increasingly easy to book and shop online for luxury brands through electronic platforms such as WeChat. Around 80% of luxury brands are now available online in China through e-commerce platforms or direct-to-consumer websites. Only 14% of global fashion brands and 25% of watch and jewelry brands have no China e-commerce presence.
These developments have dramatically changed the nature of the Chinese luxury market, propelling domestic sales to new highs and suppressing demand for purchases by Chinese travelers outside China.
China is not alone in this; the behavior of Chinese consumers epitomizes a larger global trend, dubbed the "re-localization of luxury" by Bain, which saw the growth of local luxury purchases exceed that of tourist purchases by five percentage points in 2016 -- the first time that has happened since 2001.
However, China's large population and continued high rate of economic growth put the country in a special position. As the Bain report put it: "Longer term, China remains an engine of growth for luxury goods as the country's middle class continues to grow in size and purchasing power."
China remains a country where giving expensive gifts shows appreciation of others, and local purchases and consumption of international luxury brands will continue to increase. Overseas purchases of such products will remain an important part of Chinese consumption, but will decline as a proportion of luxury spending.
Jingzhou Tao is managing partner for the Asia practice of law firm Dechert.