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China Crackdown Seen Hitting Luxury

The country's new leadership has pledged to toughen up on corruption.

Xi Jinping

BEIJING — With China’s new leadership pledging to toughen up on corruption, luxury brands that have been thriving in this country — often thanks to the massive gray market in currying official favor with expensive gifts — may be in for a bit of a slowdown.

Since Xi Jinping was anointed head of the Chinese Communist Party in November, paving his path to the presidency in March, Xi and others have sent a series of signals that they intend to clamp down on corruption, the systemic and unavoidable facet of China’s economic model. In the past week, two key points were revealed. First, Xi himself spoke openly of the need to punish corrupt officials, everyone from “flies” to “tigers,” a metaphorical reference to going after top government leaders who are corrupt as well as the lowly ones often used to make a point.

“We must uphold the fighting of tigers and flies at the same time, resolutely investigating law-breaking cases of leading officials and also earnestly resolving the unhealthy tendencies and corruption problems which happen all around people,” Xi said, in comments reported Tuesday by the official Xinhua news agency.

Chinese media have reported for several months that there has been a slowdown in luxury sales on the heels of hints that the new leadership might strengthen its anticorruption efforts. Caixin, an investigative business journal, reported last year that several high-end brands had already reported slowed growth in China, owing to signals that corruption might be curbed. In October, Bain & Co. predicted a further slowdown in luxury sales in China in 2013 with some brands already showing signs of strain.

On Monday, Compagnie Financière Richemont SA confirmed the speculation, reporting that its Asia-Pacific sales in the third quarter were flat compared with a year ago as a result of lower wholesale orders for watches and a later start to the Chinese New Year this year than in 2012.

Starting last summer, the country’s ruling State Council issued orders curbing local governments’ spending on trips abroad, vehicles and other high-ticket items. Observers have said the government crackdown on “bling” has resulted in less gift-giving to government officials, with watches one of the favorite gifts to give. The edict was aimed at reining in what has become a very public sore spot for China’s government. The latest indications from Xi are that the push against official corruption won’t stop at local governments.

Xi’s comments this week came just a few days after China’s surprising revelation of the country’s income gap, releasing its own measure of the Gini coefficient — a global gauge of income inequality that China has not published since 2005. While there remains widespread skepticism about the figure and the fact that China’s National Bureau of Statistics said the wealth gap has narrowed of late, that the statistics bureau chose to release its data after so many years of silence on a volatile issue was seen as significant by economists and other China experts.

The official numbers released by the statistics bureau put China’s Gini coefficient at 0.474, slightly down from last year, which would place China roughly on par with the U.S. By comparison, some earlier estimates placed it as high as 0.6, which is a much steeper scale of inequality and could undermine China’s careful efforts to maintain social stability amid rapid economic and personal wealth growth.

Patrick Chovanec, an associate professor at Tsinghua University’s management and economics school in Beijing, said he believes the more troubling issue for China is not the income gap, but rather an “inequality of privilege.” Many Chinese people at the bottom of the income gap are less concerned with the chasm than they are with the concept that the very wealthiest people in society have amassed fortunes based on family relations, personal relationships and government positions.

“There’s a sense that there are people who live according to a different set of rules, that power begets wealth and wealth begets power — that is what bothers people,” Chovanec said.

Dai Jianzhong, a labor relations expert at the Beijing Academy of Social Sciences, said the bottom rungs of the income data in China are populated with the country’s internal migrant workers, the people who work low-end jobs that build up the economy, but rarely share in the massive profits.

Dai said income and household registration status have created what he considers a new social class system in China, similar to ethnicity. Discontent among ethnic minorities is a lesser threat than that among the economically disenfranchised.

“It is because people have a different cultural identification [through their economic status],” said Dai. “I think these conflicts will cause tension within society.”