Will cuts on luxury goods taxes in China prevent Chinese from buying abroad?

March 21, 2012 - PRLog -- Last year Chinese tourists bought almost two-thirds of luxury goods sold in Europe as they went on a record spending-spree. But while mainlanders are happy to splurge on foreign soil, what their government needs is for them to open the purse strings at home. Domestic consumption has shrunk to just 36% of gross domestic product and is increasingly the weak link in China’s growth.
One step to redress this spending imbalance is to cut penal mainland taxes on consumption and luxury goods. Analysts say such a move now looks likely.
This could have far-reaching consequences for one of the biggest investment stories of recent years — outbound spending by mainland tourists.
Everyone from retailers in Hong Kong, to London or Seoul could feel the fallout, while foreign luxury brands seeking to expand in China should be buoyed by any duty cut.
Expectations that a move is imminent were fuelled by widely reported comments earlier this month by former deputy commerce minister Wei Jianguo, to expect at least two rounds of reductions on import taxes on consumer and luxury goods. Then, this past weekend Finance Minister Xie Xuren promised to improve China’s consumption tax.
Among the spending habits likely to catch authorities attention say Credit Suisse is the revelation that Chinese residents spent 300 billion yuan ($47.4 billion) overseas on their bank cards in 2011, up 66.7% on a year earlier, according to data from China UnionPay.
And as well as accounting for 62% of all luxury consumer sales in Europe last year, mainland shoppers spent a whopping $7.2 billion during the recent Lunar Year holiday, up 28.6% on the previous year according to the World Luxury Association.
If you look at existing tax rates in China, it is easy to see why shopping overseas is so popular.
Import duties on general luxury products range from 10%-25%, and can be as high as 35%-60% on luxury cosmetic products and alcohol. Add on value-added tax (17%) and a consumption tax depending on the merchandise and prices on the mainland are penal. According to a survey by the Chinese Ministry of Commerce, prices for luxury goods in China are 45% higher than in Hong Kong, 51% higher than the U.S. and 72% higher than France.
If these taxes were designed to promote social fairness and curb bourgeoisie shopping habits by targeting rich consumers, they appear to be missing the mark — luxury spending at home is just being diverted overseas by globe trotting mainlanders.
Another reason to expect action on taxes is the government’s recent focus on boosting growth through domestic consumption. This past weekend in Beijing Vice Premier Li Keqiang said expanding domestic demand is a “strategic point” for economic development. Another official played up China’s readiness to import, predicting it may soon become the world’s largest importer.
This eagerness to import, however, comes at a time when China just recorded a monthly trade deficit in February of $31.5 billion. With export growth expected to remain relatively weak, this provides another reason for authorities to be less sanguine about yuan leaking abroad through unchecked tourist spending.
Meanwhile, it is also worth considering that for many mainlanders, shopping abroad is not just about getting a tax-free bargain.
China’s capital controls and limited domestic investment options mean luxury shopping often fulfills various secondary needs.
In Macau, for instance, purchasing luxury goods can be a handy way to access hard cash. A typical story is a mainlander shopper can buy an expensive handbag or watch on their credit card, which can then be sold back for something like 90% of the value in cash.
In fact, luxury handbags have almost become a money substitute. Milan Station Holdings Ltd. , a chain of shops that trades second-hand handbags even listed on the Hong Kong stock exchange last year, which gives you an idea how big this business is.
This, as well as a preference by many mainlanders to conceal conspicuous luxury shopping overseas, means old shopping habits could be hard to change.
If we do get a cut in luxury taxes, Credit Suisse, say luxury brands who import their goods into China will benefit such as Prada, Coach, Hugo Boss, LVMH or Tiffany.
The flip side, they add, is that for the retail and tourism industries that have benefitted from outbound Chinese tourists, any reduction in import tariffs will be incrementally negative.
But according to China Elite Focus, a Shanghai-based marketing and research firm specialized into reaching to affluent Chinese outbound tourists, these tax modifications will have small impact on the behavior of Chinese shoppers “Buying abroad luxury goods is first and foremost a sign of social status” said Pierre Gervois, China Elite Focus’ CEO. He added “ The fact that Chinese buyers will pay less their luxury goods if they buy in the U.S. or in Europe is a minor factor compared to the prestige of having bought a Tiffany diamond in New York City or a Louis Vuitton bag in Paris”
On the list of potential casualties is Hong Kong, Macau, South Korea to retailers in Europe. Hong Kong could be particularly vulnerable given 28 million mainland tourists visited last year (four times its population) and its huge concentration of luxury retail brands — Louis Vuitton has seven stores in the city, one more than Paris.

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The leading marketing agency for tourism & travel Industry targeting the affluent Chinese Outbound tourists. China Elite Focus builds high impact marketing campaigns on the Chinese web for luxury hotels worldwide, Incoming Tour Operators, Tourism Boards.