The promotion of the Chinese middle class has a glimmer of luxury

London, August 23 (Reuters Breakingviews)-Luxury goods companies are vacillating and Xi Jinping should be blamed. The president of China wants to control the super-rich and redistribute wealth to grow the middle class. Last week, the market value of companies such as Kering Group (PRTP.PA), the owner of Gucci with a market value of 95 billion U.S. dollars and LVMH (LVMH.PA) with a market value of 362 billion U.S. dollars, shrank by 14% due to concerns that their best customers are being squeezed. Tighten the waistband. Worry is unnecessary.

According to data from Euromonitor, China will account for about 40% of global luxury goods demand this year. The most populous country in the world also provides the best growth opportunities for consumer goods companies. Bain consultants believe that China will become the industry’s largest market in the next few years. This is why attempts to demonize the purchase of a Birkin bag for $40,000 or a Saint Laurent tuxedo jacket for $3,000 have oscillated the stock price. There is also a precedent: High-end Cognac manufacturer Touma Cointreau (RCOP.PA) produced precious drinks for corrupt officials, which frustrated China’s efforts to curb palm oil in 2014.

Take LVMH as an example. The blackmailing manufacturer of monogram suitcases shrank 11% in market value last week. Even after adjusting for the small sell-off of the Frances CAC 40 blue chip benchmark index, the drop was still 8%. This means that LVMH’s overall revenue, or Asian sales, which account for 19% of its revenue, has been similarly hit, almost halved.

Either overreacted, or the stock is already too high. First of all, Xi Jinping’s promotion may be unsuccessful. This is not the first time that a Communist Party leader has failed to redistribute wealth. Second, spreading wealth may not have completely negative consequences. In addition to the ridiculously high price of small play accidents, LVMH also left a lot of debris for hoi polloi. According to the definition of the National Bureau of Statistics, increasing the number of middle-income households with an annual income of 100,000 yuan (US$15,200) to 500,000 yuan can boost the sales of these products.

In addition, the absurdly rich can only buy so many Ferraris or Bugattis. At the same time, even if suitcases are still out of reach, those with lower incomes will still want lipsticks and wallets printed with monograms. Similarly, the $40 Moet & Chandon champagne may become an affordable treat for more people. Of course, it depends on luxury not becoming a dirty word, given its current power as a status symbol, this is a fairly safe bet.

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Contextual news

-Chairman Xi Jinping presided over a meeting of the Central Committee of Finance and Economics on August 17 to emphasize the importance of common prosperity.

-The Beijing government hopes to expand the size of the middle-income group, increase the income of the poorest people, and reasonably adjust the income of the richest people.

-By August 20, the stock prices of luxury goods companies such as LVMH, Kering and Herms International had fallen by 14% due to concerns that cracking down on conspicuous consumption would reduce their sales.

Edited by Ed Cropley and Oliver Taslic