Move Over America, China is the New Capital of Bling

25 November 2009. Back in 2001, I did some consulting work for CHANEL in Asia. They are one of the leading providers of luxury products, otherwise known as Bling, selling fashion, perfume, cosmetics, watches and jewelry, and were growing fast in Asia.[br]

25 November 2009. Back in 2001, I did some consulting work for CHANEL in Asia. They are one of the leading providers of luxury products, otherwise known as Bling, selling fashion, perfume, cosmetics, watches and jewelry, and were growing fast in Asia.[br]

Back in those days Japan was the motherlode, while Korea was growing double digits. What about China, I asked? They had just started selling in China, I was told, but it was a bit of a shabby market for them. Chinese customers were accustomed to buying fakes and no-one was sure if there would be any appetite for high-priced luxury goods.

My, how times have changed. Who would have thought that within 8 years, China would be challenging to become the largest luxury market in the world, overtaking Japan, a market that was fairly new to the crown itself.

It feels almost inevitable now, since China is just in the process of overtaking Japan as the world’s second largest economy., and has just become the largest exporter in the world.

But for anyone who has seen that transformation, it is nothing short of astonishing, particularly when contrasted with the sudden collapse of the US, former Empire of Bling.[br]

According to consulting company Bain & Co, the Luxury goods market has been pummeled globally. In the first half of the year, the market shrank from $220 billion to $198 billion, reporting quarter-on-quarter losses of 15% in Q1 2009 and 20% in Q2 2009.

The forecast is for a 10% drop for the year, implying a stablisation of the market.

Peer deeper, however, and you will find it is actually a transfer of wealth. Emerging Markets are rich growth areas for CHANEL and their kin, led by China and Russia. China alone is expected to grow its luxury market by a staggering 12%. The wealthy nations of the G7 – the US, Japan and Western Europe – are rapidly de-blinging. The US luxury goods market will be down 16%, Japan down 10% and Europe down 8%.

It is not that hard to understand the latter dynamic.

A report by First American CoreLogic today showed that one in four homes was ‘underwater’ – meaning that the current value of the house was less than the value of the mortgage being paid off, also known as negative equity. In Nevada, nearly one in seven homes is underwater.

Couple that with an unemployment rate that is fast approach 10% officially (and in reality is much higher); a trend towards a negative savings rate until the onset of the crisis; and the fact that wages for most have stagnated, and you have the world’s largest – and still the most important – economy with a disturbing dynamic. A small portion of the population, 1% or less, is making flabbergasting amounts of money during this Financial Crisis, thanks mostly to Wall St and crony boardrooms. Everyone else is getting poorer.

They are de-blinging not only physically but psychologically. It is now positively rude to show off wealth in the west. Unless, of course, you live within the bubble of what MarketWatch.com today memorably called the pathology of Wall St.

In China, meanwhile, almost the reverse is happening. This is an economy that will grow at a 7% – 8% rate this year.

A lot of that growth has been driven by the massive stimulus program, which has created millions of jobs and helped push up wages.

Add in also the fascinating demographic trend that we highlighted in our article on Chinese kids with six pockets being the future of the world economy. In order to stop their population explosion, the Chinese authorities have run a very successful One Child policy.

The unintended consequence of that policy is that there are six adults (two parents and four grandparents) who only have one child to lavish their attentions – and wallets – on.

This generation of Pheonix Princes and Princesses are confident, well educated, have good jobs, access to multiple funds, and believe that China is the future of the world.

In short they don’t have to worry about money – but status is important. As with any group of people that experiences sudden wealth. There is a lot of money to spend on well-known brands – Mercedes, LV, Mont Blanc, Gucci, Rolex and so on – but lack of experience leads to lack of discernment and therefore class.

A study by Pao Principle found that 90% of the well-off Chinese had purchased a designer bag within the last year; two thirds of men had bought a luxury watch, whereas a third of women had bought a designer watch and another third had bought Tiffany jewelry.

It is maybe not surprising that Chinese Netizens having been blasting their more flashy compatriots, saying that these are not traditional Chinese values of modesty, thrift and hard work.

Another commenter reminds readers that displays of wealth have been common, at least with the elite. Take a look at the Forbidden City or its KMT-lifted loot in Taipei, and you will see plenty of evidence for that.

The difference is now that hundreds of millions of Chinese are starting to feel rich enough to flaunt it – while hundreds of millions of Americans, Japanese and Europeans feel that the milk-and-honey days are over.

Keith Timimi

EconomyWatch.com