China's demand for luxury goods still growing

China’s taste for luxury goods seems to be unaffected by the pessimistic global sentiment affecting overall economic growth. Hermes sales increased by 22% globally during the second quarter, compared to 50% growth in China, while Bulgari sales in Greater China jumped by 67% in the first half.

“The concept of mainland Chinese spending on luxury is not new; what’s new is what they are spending on right now,” said Aaron Fischer, head of consumer and gaming research at CLSA, during the firm’s Investors’ Forum in Hong Kong this week.

China’s monthly jewellery sales grew by 12% a year from 1997 to 2007. After a drop during the financial crisis, growth rebounded to 27% in 2009, and jumped even higher to 56% in 2010 — and that rate of growth has continued into this year, with the pessimism in Europe and the US apparently not affecting Chinese high-end consumers’ mood at all.

“Penetration of luxury goods right now in China is very low,” according to Fischer. The size of the luxury market relative to the economy — a ratio that Fischer uses to measure market penetration — is only 0.21 in China, compared to 2.57 in Hong Kong, 1.7 in Singapore and 0.99 in Taiwan. Aaron forecasts that market penetration in China will double to 0.55 by 2020.

“The key driver is the economic driver; the fact that people in China have got more money to spend,” said Fischer, who predicts that per-capita disposable income in China will grow at around 12% to 2015, compared to 7% for Asia-Pacific and 5% for the whole world.

Income distribution in mainland China has also been changing fast. Around 30% of Chinese had an income higher than $7,500 in 2010, but that will skyrocket to more than 60% by the end of 2020, CLSA predicted.

On the face of it, Chinese consumers love luxury goods. A survey conducted by China Reality Research showed that 53% of respondents have bought or plan to buy luxury goods, with 22% who are willing to buy but cannot afford to.

Fischer said that Greater China demand will drive its global market share of luxury goods to 44% in 2020, from around 15% in 2010. “The Greater China market will account for half of the luxury market in 10 years,” said Fischer.