China Said To Cut Luxe Tariffs To Boost Domestic Consumption

Here, if true, is a drop of bad news for luxury goods retailers in London, Paris and Hong Kong: China is planning to cut the taxes on high-end watches, shoes, clothes, bags, cosmetics and the like to encourage more domestic consumption, according to a report last week in the 21st Century Business Herald. (Update: Finance ministry officials have denied the report which was based on statements by Commerce ministry officials. That probably means the two ministries are still arguing over the details of how much the luxury tax and import duties will be trimmed, in what mix, on which products and how the change will be phased in. )

Duties of 65% on fine wines, 50% on cosmetics and 30% on watches have driven many wealthy Chinese to pick up such luxuries duty free on foreign shopping binges, a trend further encouraged by the spread of China Union Pay terminals abroad; Harrod’s department store in London now has 40, giving Chinese visitors ready access to their bank accounts back home. With a forecast 65 million tourists coming from China this year, up from 57.4 million last year, it is perhaps not surprising that Burberry’s says that Chinese account for half of its sales in London.

A Commerce ministry study found that prices of a sampling of 20 luxury goods were 51% higher in China than in the U.S. and 72% higher than in France, the most popular European destination for Chinese shoppers and where they spent an estimated 650 million euros ($1 billion) on duty free items in 2010, according to a survey by Global Blue, a tax-free-shopping group. The World Luxury Association, a trade organization, estimated that Chinese consumers bought a total of $10.7 billion worth of luxury goods (exceeding transport–planes, yachts, cars) in 2010 with four out of five of those dollars being spent outside China.

Even though China has lowered its average import tariffs to 9.8% from 15.3% since joining the World Trade Organization, it still has some of the world’s highest tariffs on luxury goods. The 21st Century Business Herald says that some import duties may be scrapped altogether, with the National Day holiday in October the target date for the change. (That assumes the commerce and finance ministries have resolved their trade balances vs tax revenues dispute by then; it will probably have to be refereed at State Council level.)

Most top international luxury goods retailers, including LVMH, Gucci and Hermes, have dozens of stores in China already to cash in on the fast growing ranks of China’s wealthy. Coach, a high-end U.S. leather accessories manufacturer, for example, has said it plans to increase its sales within China to $500 million from $100m within three years. Such foreign luxe retailers won’t necessarily lose sales overall because of tariff cuts; indeed they will continue to have the twin winds of growing Chinese international travel and rising wealth in their sales, but they could feel an inelegant pinch to their profit margins.

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