China’s 20% Tax Crackdown Piles Pressure on Luxury Brands
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China’s 20 per cent tax crackdown on wealthy individuals has become the latest headache for luxury brands ahead of third-quarter financial results. Under Beijing’s new rules, affluent citizens who used offshore trusts to shelter assets have until October 22 to declare and pay years of back taxes, threatening spending in a market that generates roughly a fifth of global luxury purchases.
Shares in LVMH and Birkin bag maker Hermes are both down about 40 per cent this year near multi-year lows, while Gucci owner Kering has fallen 29 per cent. Summer shopping mall data in mainland China pointed to a sharp deceleration in growth, according to Bernstein analysts.
Tax Deadlines and Retail Liquidity
The 20 per cent levy is hitting spending by ultra-high-net-worth individuals, a tier that had previously proved more resilient than middle-class consumers affected by China’s prolonged property downturn. Alexis Bonhomme, head of Shanghai-based luxury consultancy Trinity Asia, noted that some shoppers face short-term liquidity constraints before the compliance window closes.
“Until the deadline to pay the tax, some people may face liquidity issues”, Bonhomme said. “This doesn’t mean they won’t start buying again, but right now, the mood just isn’t there,” he added.
Quiet Luxury Pulls Ahead in Mall Aisles
Two industry sources familiar with third-quarter mall trading in mainland China said overall conditions remained weak, although performance varied widely between brands. Smaller “quiet luxury” labels such as cashmere specialist Brunello Cucinelli and LVMH’s Loro Piana are outperforming more conspicuous brands such as Louis Vuitton and Gucci.
“Until the deadline to pay the tax, some people may face liquidity issues”
High-end jewellery remains a bright spot. Brands such as Richemont’s Cartier have benefited as wealthy consumers increasingly favour gold and precious materials, which are viewed as offering more enduring value.
Global Headwinds Compound Asia Weakness
The slowdown in China comes as luxury demand softens in the United States, the industry’s largest market. US credit card spending on luxury goods tracked by Citi fell for a third consecutive month in September as consumer confidence weakened ahead of midterm elections.
Luxury houses are also grappling with fallout from the Iran war. Kering has already warned analysts to expect a further contraction at Gucci, prompting brokerages to cut their stock price targets.
Earlier Strains and Upcoming Earnings
The $350 billion luxury sector remains mired in a three-year slowdown after pandemic-era demand weakened. In downtown Beijing, Deng Qi, an exporter of ceramic building components, forecast 20 per cent less luxury spending than in previous years, warning that the offshore tax measures undermine confidence across the broader wealthy demographic.
Investors will receive their first read on the sector when LVMH reports results on Monday, with analysts forecasting quarterly sales of €18.5 billion ($20.7 billion), up 1 per cent from a year earlier. Kering and Hermes report their quarterly performance on October 22.
Questions & Answers
Q.How long do affluent citizens in China have to declare and pay their back taxes?
How long do affluent citizens in China have to declare and pay their back taxes?
Wealthy individuals in China have until October 22 to declare assets held in offshore trusts and pay years of back taxes, according to Beijing's new rules regarding the 20 per cent tax crackdown.
Q.Which luxury brands are performing better in China's current market conditions?
Which luxury brands are performing better in China's current market conditions?
Smaller 'quiet luxury' labels like Brunello Cucinelli and Loro Piana are outperforming more conspicuous brands. High-end jewellery, such as Cartier, is also a strong performer as consumers favour lasting value.
Q.What is the expected sales growth for LVMH when they report their quarterly results?
What is the expected sales growth for LVMH when they report their quarterly results?
Analysts are forecasting LVMH's quarterly sales to be €18.5 billion, which represents a 1 per cent increase from the previous year. LVMH is set to report its results on Monday.
Q.What is impacting luxury demand in the United States?
What is impacting luxury demand in the United States?
Luxury demand in the United States is softening, with credit card spending falling for a third consecutive month in September. This is due to weakening consumer confidence ahead of midterm elections.
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