New China Rules Could Hamper Luxe

The Chinese government unveiled new regulations barring government agencies from purchasing luxury items, goods or commodities "above certain standards."

HONG KONG — As concerns mount over China’s economic slowdown, luxury executives might have to contend with another piece of news coming out of the country that could dent sales.

This story first appeared in the July 13, 2012 issue of WWD.  Subscribe Today.

This week, the Chinese government unveiled new rules barring government agencies from purchasing luxury items, goods or commodities “above certain standards,” according to state-run media. The new rules could deliver a further blow to luxury sales in China, which are already showing signs of slowing down.

Gift-giving is an ingrained part of doing business in China. Expensive gifts such as watches or cars are used to strengthen relationships and deals. But upcoming changes in the government leadership and growing dissatisfaction over the country’s widening income disparity have led to a clampdown on such shows of conspicuous consumption.

The new rules, which will go into effect Oct. 1, are aimed at curbing ostentatious spending by government officials, reported news agency Xinhua and newspaper China Daily. Officials who don’t follow the new frugality rules may face disciplinary action, including the possibility of being dismissed from a post, according to the reports.

China’s public institutions, including legislative bodies, courts and political parties will need to adapt to the regulations.

“While the regulation appears to be particularly targeted at expenses that were incurred by the government and notably luxury cars, food, spirits and travels (rather than watches, suits and pens), they set the tone for a more serious crackdown on briberies,” J.P. Morgan Cazenove analyst Melanie Flouquet wrote in a note earlier this week.

Flouquet said that some luxury executives, notably in hard luxury and suitmaking, have noted a cooling of gift giving in the government transition. Most had hoped that sales would recover in November once the new appointments came on board but this new regulation “puts in question the speedy recovery of gift-giving.”

Stacey Cartwright, chief financial officer of Burberry Group plc, said “There has been a slowdown in gift-giving. We don’t have a great cause for worry, but there has been an impact.” As reported, Burberry posted Wednesday weaker-than-expected first-quarter figures.

More broadly, Simon Tye, executive director at Ipsos in Hong Kong, a market research firm, has noted a downward shift in Chinese shopping patterns recently.

“There’s a bit of a shift in what’s happening with what people are buying. We see that they’re buying lower-priced items. Let’s say men who usually buy jewelry are now switching to cosmetics for their girlfriends,” he said.

That said, “buying is still strong and preference for luxury is still very strong” among consumers, he concluded.

In the latest sign that the Chinese luxury market is starting to soften, Hong Kong-based Chow Tai Fook said Thursday that same-store sales at its Hong Kong and Macau shops declined by one percent in the first quarter. The company last month also reported that same-store sales growth in China declined slightly in the last fiscal year, increasing by 32 percent, down from 35.2 percent in the previous fiscal year. Chow Tai Fook claims to be China’s largest jeweler.

China has seen a less-than-stellar string of economic data recently. On Tuesday, the country said its June imports and exports slowed and issued a bearish forecast for the second-half of the year, citing the ongoing global financial crisis and low consumer confidence.

Today, China is expected to release second-quarter GDP data signaling a slowdown from the 8.1 percent growth it registered in the first quarter.