China’s luxury consumption story to stall against structural economic deceleration


Alicia García Herrero (Natixis) | China has become one of the most important luxury consumption markets for foreign brands, but economic headwinds may cloud the outlook. With rising purchasing power and appetite in luxury spending, Chinese consumers have become more relevant globally. This report addresses what to expect in China’s luxury segment amid structural economic deceleration and geopolitical tensions.

Introducing Natixis China Luxury Consumption Index

We aim to analyze the present and future trends in luxury spendings through the newly created Natixis China Luxury Consumption Index. It provides the overall and granular view of different luxury sectors, such as cars, personal goods, hospitality, and wine and spirits, forming around 90% of the segment globally.

The uphill battle of enticing consumers towards luxury spending

China’s luxury consumption is rapidly growing as the population becomes more affluent. During the COVID pandemic, China more than doubled the growth rate of other markets at 33% year-on-year in 2021. Part of the momentum was a shift from overseas spending by Chinese tourists towards domestic markets due to border control. With renewed outbound tourism and signs of consumption downgrade, China’s luxury consumption growth converged to 12% in 2023, only slightly higher the 9% globally.

Among different luxury segments, car sales have been resilient due to the demand in electric vehicles (EVs) and tax incentives. However, the increasing dominance of Chinese players in luxury EVs with 30% of local market share implies foreign automakers will face more headwinds. For personal goods, it is about how much a brand can raise prices to offset the sales quantity pressure to boost revenue. The biggest challenge comes from new domestic brands in cosmetics and perfume.

Despite the reopening, the recovery in luxury hotels is falling short of expectations due to structural reasons. With consumption downgrade, deflationary pressure and tightened corporate travel budget, hotel revenue is estimated to be 79% of the 2019- level in March 2024. The demand appears to be weak as hotel supply has reduced simultaneously. On wine and spirits, the sales are weaker than the pre-pandemic level and higher prices are not able to offset the consumption decline in quantity.

Gold as a dual consumption and investment alternative

In contrast with the above trend for luxury goods, gold stands out given the poor stock market, real estate performance and tight capital controls. China’s mass affluent scrambles to preserve the value of their assets in the light of asset price deflation and a weak currency. It is hard to see how demand for gold may wane if the greenback stays strong and household outlook stays cautious.

Outbound tourism recovering for high spenders

Externally, China’s outbound tourism expenditure has recovered to 94% of the pre-pandemic level in March 2024, higher than 74% in international passenger traffic. The loss in purchasing power overseas is noticeable in the number of travelers but it does not stop those traveling from spending nearly as much as in the past. Still, part of the spending may reflect of capital flight and not actual tourism expenditure.

China’s quest for luxury to decelerate

With a low GDP per capita of around $13000, China already has a higher luxury market-to-GDP ratio of 2.4% than many other markets. Fast income growth was the driver coupled with a status-conscious mentality and cultural norms. However, this trend may change for structural reasons.

First, China’s disposable income is decelerating with a lower consumption propensity. For each additional yuan households receive, they tend to consume a smaller part of it. The regulatory changes and state-led wage cut in some sectors have dampened sentiment, and the weak property and equity outlook also harm passive income.

Second, consumers are saving more due to weaker income expectations. China’s overall household wealth still ranks second globally, only after the US. This means that China’s luxury market remains very relevant for global brands notwithstanding the headwinds from poorer sentiment.

Our take at this crossroads is that China’s luxury market may stall given structural deceleration. The weaker yuan and the low inflation environment in China mean the cost of luxury spending will be higher, deterring more middle-class consumers. Tax will be another important factor, especially as some tax incentives may be reduced. As such, boosting luxury spending in China will be an uphill battle but the market will remain large. Finally, the recovery of the overseas expenditure is another important trend which is likely to continue unless capital controls become even more stricter.