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HSBC Sees Robust Luxury Demand in China

Research Indicates Strong Jewelry Demand
Sep 15, 2011 7:05 AM   By Dilipp S Nag
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RAPAPORT... Demand for luxury goods is likely to remain robust for mainland China and Hong Kong as fears of a sharp slowdown in the region appear exaggerated, according to HSBC Global Research.

''HSBC predicts that Chinese domestic demand will be strong enough to offset any potential slowdown in exports, with consumer demand fuelled by income growth and high savings,'' the company stated in a report on the Chinese luxury sector. ''For the luxury market in particular, we expect China to fuel the majority of the sector’s growth over the coming years.''

The researchers forecasted that the Chinese economy will not experience a sharp decline this year and that the country is on track for a soft landing with gross domestic product (GDP) expected to rise by 9 percent in 2011, slowing from the 10.3 percent growth of 2010. Unlike predictions of a slowdown for the Western world though, HSBC expects no material impact on the demand for luxury goods since penetration remains so low in China among the general population.

The company remained bullish on the Chinese luxury market, which it said should outpace growth in the general market driven by increased wealth and a changing, more embracing, culture for luxury.

The new rich in mainland China seem to be younger than those in other parts of the world and luxury purchases have become a status symbol and a means to show one’s social standing, the report explained. HSBC noted that these trends will continue to translate into growing purchases of luxury good.

In contrast, the report noted that negative economic sentiment for U.S. consumers tends to have a psychological effect on the wealthy, even if they have the money to spend.

''Today, we suspect the political fight on debt, the S&P rating downgrade of the U.S. and the equity market slump will play on the high-end consumer’s psyche in reverse,'' HSBC wrote.

HSBC estimated that sales of global luxury brands in China have grown by more than 30 percent in the past four years, outpacing income growth, and that China should overstake Japan as the country with the largest luxury consumption in the world by the end of 2011. The same trends are expected to apply in the jewelry sector.

''As in all countries barring Japan, we feel Chinese consumers are gradually trading up to higher end local jewelry brands and imported luxury brands from unbranded jewelry and lower tier,'' the report stated.

HSBC expects growth in jewelry sales to outpace watch sales given the different business and distribution models governing the respective sectors. 

''Watches are predominantly distributed on a wholesale basis, so in an economic down-cycle, the need for distributors to reduce working capital and raise cash might lead to higher volatility in watch sales,'' the researchers explained. ''On the other hand, the jewelry retailers will more commonly have a direct retail model, so they are less volatile in a down market.''

The report stressed that Chinese jewelry companies are also witnessing an increasing number of customers who are looking to buy loose diamonds as a store of value.

The Future is Female

HSBC stressed that women-led luxury consumption will outpace purchases made by men, especially as women become more self-sufficient and may look for opportunities to reward themselves. ''We think jewelry is one category with which they can choose to do so,'' the researchers said.

According to the National Bureau of Statistics in China, there were almost 197 million women between the ages of 30 and 49 in 2009, representing almost 17 percent of the total population, HSBC said. This target audience, which is bigger than many countries’ population alone, has huge potential as these women become more-engaged luxury consumers, it added.

HSBC said that a major reason for jewelry purchases in China is for weddings and it expects growth in the wedding market to accelerate. Currently, wedding-related demand accounts for 10 percent of total gold jewelry demand in China, it estimated.


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Tags: China, consumer, diamonds, Dilipp S Nag, Hong Kong, HSBC, Jewelry, luxury, luxury goods, spending, survey, US Europe, wealth
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