Breakneck Development Of Luxury And Cultural Sectors In Last 20 Years Indicates That Chinese Luxury Consumers Will Be A Huge Global Force For Foreseeable Future
Over the last few weeks, as the ongoing global economic woes further put China, and its relative insulation from the worldwide crisis, in the spotlight as a luxury and business “success story” we have seen a much stronger focus on the Chinese consumer. Observers look to Chinese consumption as one of the keys to a faster global recovery, and luxury watchers see news like store openings in China, auction results, and even stories of wealthy Chinese tossing their wealth around freely as signs that the Chinese upper-middle and upper class are spending again. Today, an article in Wealth Bulletin hints that luxury executives who are worried that the Chinese market is not solid enough to invest their full faith into that consumer class can breathe a tentative sigh, as they cite the Julius Baer Luxury Brands Fund’s 27% rise in Euro terms, versus a 17% rise in the MSCI World:
Julius Baer said in a report today it predicts profit margins will remain in double digit territory for many luxury companies, despite the global economic slowdown.
These bullish findings indicate that the global wealthy are still buying luxury goods, which is, in some ways, unsurprising — but this has to be qualified by looking into how these numbers have risen. Although the Julius Baer index notes a rise, it does not break down the demographics of who is buying high-priced luxury goods. Based on other data, it seems that the influence of emerging wealthy consumers from places like China and, to a lesser extent, the Middle East and India, who are bolstering the luxury market.
In the same Wealth Bulletin article, there is an indication that recent financials, though subpar to say the least, still give observers a sense that — in the next 10 years — the global luxury market will be in far better shape as a result of adjustments made in the midst of the global financial crisis:
Georges Kern, chief executive of watch maker IWC, said in the report: “By 2020, there will be 350 million people in China who are in the position to buy a luxury watch.”
This, I think, is the key to understanding the future of luxury. Within 11 years, as this executive sees it, China will be one of the main drivers of luxury revenue — but since we have already established that luxury watches and jewelry are popular with Chinese buyers at auction (even in 2009), what else will they be buying in 2020?
In recent auctions of fine wine, Chinese buyers have been some of the most enthusiastic and active. As the Financial Times writes,
In the wine market…bottles of Château Lafite and Louis XIII are indispensable accoutrements for display in the gleaming new mansions of China’s super-rich, although such badges of wealth are more likely to be seen as investments. The cachet of ordering an expensive bottle also still far outweighs the pleasure derived from drinking it, and Chinese nightclubs are filled with wealthy people ordering top-shelf cognac then mixing it with gallons of sweet, green-tea-flavoured soft drinks.
In coming years, we can expect even more Chinese consumers to become interested in foreign wines and spirits — and with partnerships like the new Lafite JV in China ensuring that wine increasingly becomes both a foreign, imported indulgence and a domestically-produced one as well, by 2020 I would expect Chinese wine-drinkers to comprise one of the largest groups, if not the largest in the world in terms of both consumption and collecting.
Much like wine, art is a party to which the Chinese have arrived somewhat later than their Asian neighbors or Western counterparts. However, the incredible speed at which Chinese art — and Chinese art collectors and enthusiasts — have caught up and in some ways surpassed established art “superpowers” has been astonishing. For a country that had virtually no contemporary art until the late 1970s, and whose artistic output for 30 years (1949-1979) relied solely on Socialist Realism, China has burst onto the art scene with motivation and ambition among artists, gallery and museum owners, scholars and art administrators not seen in one country for decades.
With a rapid rise in the visibility of Chinese artwork, like any country’s artwork, there has been an attendant, albeit gradual, rise in art collection among wealthy Chinese. For years, art collection in the Greater China region has been the domain of internationalized Hong Kong and Taiwan residents, who benefitted from their access to international markets and galleries. Now, though, as we’ve seen the number of home-grown auction houses in China — including Guardian and Poly — increase in influence and quality, Chinese art is finally finding a Chinese home. By 2020, I would expect to see individual collections and acquisitions by major Chinese museums grow at a steady pace, and I would even go so far to project that Chinese art collectors will become increasingly influential on a global level, traveling to auctions around the world to acquire works by non-Chinese artists as well.
Essentially, I don’t see wealthy Chinese that differently from those from other countries. Once they’ve made their major purchases — luxury car(s), house(s), international travel — they begin to look at things like art, which they love because they are both a decoration as well as an investment.
Gold has, throughout Chinese history, been a popular “hedge,” and as GDP and median income has grown it has become even more popular. As the FT writes,
When it comes to…gold jewellery and gold bullion, for either adornment or investment – trade in China has risen sharply. Beijing recently revealed that it had been secretly buying gold for years in order to diversify its foreign reserves, and had almost doubled its bullion holdings. But they are not the only ones: the rising tide of wealth among middle-class Chinese has made China the second-largest gold jewellery market in the world since 2007, behind only India. Sales of gold and silver jewellery in China rose by an astounding 28.7 per cent in May year on year – proof, if any more were needed, that Chinese consumers have certainly not stopped spending money during the financial crisis. Total gold demand in China last year was nearly 400 tonnes, up by 21 per cent from 2007.
But Chinese people like their gold purer than their western counterparts: 24 carat, rather than 18 carat. The reasons for that, says Shi Heqing, gold analyst at Beijing Antaike Information, are partly historical: “Chinese people have gone through several wars in the last century, and the memory of those is still fresh, so they like secure ways of keeping their money. In the west, people seem to use gold more for decoration or beautification.”
Again, by 2020 I see gold in China becoming even more important, but I don’t forecast a sharp increase. Rather, I see the highest level of buyer diversifying into new areas by 2020, but I do thing that growth in second- and third-tier cities (or maybe fourth-tier cities, by that time) will continue to push gold purchases for the next few decades at least. What this will mean for the price of gold, I cannot say, but it will definitely mean that China will stay one of the world’s most important gold markets — not that it isn’t already — possibly rivalled by India.