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Government calls for “common prosperity” raise concerns about China’s luxury purchases

November 1, 2021
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Why this is important to Wisconsin businesses: Wisconsin companies exporting luxury items could eventually see a broader market from Chinese consumers, the Chinese government says.

Concerns have been rising within the luxury industry since Chinese president Xi Jinping announced in September that China should work toward “common prosperity” for its citizens. Analysts and investors fear the aim to reallocate wealth will decrease the luxury goods purchasing power of China’s upper class. China’s demand for high-end products is a key driver of the sector, accounting for one-third of European luxury goods makers’ sales in 2019 and 28% in 2020. According to Reuters, shares of luxury goods companies such as Louis Vuitton owner LVMH, Burberry, and Gucci owner Kering lost about $120 billion USD in value after the announcement.

Common prosperity is not a completely new concept. During Mao Zedung’s reign in the 1950s, this concept was evoked in domestic economic reforms toward socialism. In 2012, the 18th National People’s Congress of the Communist Party of China called common prosperity a fundamental rule of China’s political and economic system, moving away from the previous policy, which was to let some of the people and part of the region become rich first. At the 19th meeting of the National People’s Congress, government leaders said common prosperity should be realized by 2050.

Major points in Xi’s policy include:

  • Increase people’s property income through various channels, including investment in the capital market.
  • Expand and equalize the availability of public services.
  • Improve the multi-level social security system.
  • Optimize the income distribution structure, including tax reform.
  • Expand the middle class and raise the income of low-income citizens.
  • Provide more “third distribution,” involving charity and donations from the wealthy.

Many luxury brands and analysts are concerned that China will focus on taxing the rich, as Xi said it was necessary to regulate high-income groups. The government has proposed a property tax on homes, which could be implemented in 2022 in certain cities. Xi also stressed third distribution, which encourages high-income groups and enterprises to return more money to society. The proposals for taxing the rich and third distribution are predicted to lower both the purchasing power and the willingness of rich people to buy luxury goods.

The Chinese government says redistributing wealth will focus on increasing residents’ income, setting up comprehensive fundamental public services and social welfare instead of significant income redistribution. One of the main goals of Xi’s promotion of common prosperity is to expand the middle class, which increases the number of people who are able to purchase luxury goods and improves the purchasing power of the general population.

The National Bureau of Statistics of China defines the middle class as those with an annual household income ranging from ¥50,000 ($7,900 USD) to ¥500,000 ($79,000 USD). This group has met basic needs and can begin to afford higher-end products.

According to the World Luxury Association, demand for luxury goods begins when per capita monthly income exceeds $1,500 USD and rises when per capita monthly income exceeds $2,500 USD. China’s plan to improve residents’ income and expand the middle class could bring a wider customer base and stronger purchasing power to the luxury market, which ultimately could benefit Wisconsin companies that manufacture luxury items.

 

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