It's a spree country
Ou Yangkun, the chief executive of the mainland office of the World Luxury Association, was recently shopping in Beijing for a diamond-studded Hermes belt buckle called Starry, which costs US$45,000. He was out of luck. Shops were sold out everywhere and the best staff could do was put him on a waiting list.
'The buckle is an ideal gift for people who hope to keep low-profile because it's not easy to see under one's suit,' says Ou.
March is a busy month for luxury sales in Beijing, as the city is crowded with dignitaries and entrepreneurs who come for the annual gathering of the National People's Congress, and the Chinese People's Political Consultative Conference. Scarves, handbags and other goods usually sell out in the city in March, and Ou says Beijingers are now keen for solid-gold eyewear from the German firm Lotos, which costs 200,000 yuan (HK$245,000) to 300,000 yuan per pair.
It was with some unintended irony, then, that the Ministry of Commerce announced 'Consumer Promotion Month' last Monday. This is no less than a nationwide programme to boost consumer spending, to run from Ching Ming (April 4) to Labour Day (May 1).
'Each city is required to hold some activities to boost consumption,' says Shen Lan, a Shanghai-based economist for Standard Chartered. '[The scheme] will include some discounts in the shopping malls, and also activities in the restaurants and hotels. It will help to boost consumption for clothes, food, vacations and restaurants.'
It's all part of efforts to rebalance the economy, to make it more consumption-driven and less dependent on exports.
That was the message hammered home by the National Development and Reform Commission this month, which said it was aiming for a 14 per cent rise in retail sales this year.
Among initiatives, Shen says local banks are being encouraged to support more personal loans this year. 'Not just mortgages, but also consumption loans, to buy furniture, cars, or pay for vacations,' Shen says.
A scheme launched in the middle of last year that lets consumers exchange their old electronics and appliances for new items - with the grace of government subsidies - is rumoured to be revived soon, she adds.
The scheme was popular. An analyst says it was responsible for more than one third of the sales generated by the electronics retailer Gome in 2011.
There is also persistent talk of a tax cut on luxury goods.
Consumption was a big investing theme last year. Indicative of the vitality of this sector, mainland shoppers were seen everywhere on the streets of Hong Kong, buying exactly the kind of high-margin branded goods that retailers love to sell. Lured by a lack of sales tax on luxury items and the guarantee of getting authentic goods, mainlanders splurged.
Big global names such as Prada, Coach and Samsonite listed in Hong Kong last year, partly to raise their profile in this booming market. Major retailers such as Apple and The Gap have opened flagship stores in Hong Kong and the mainland to establish their brands within China.
The question facing investors is whether new initiatives are a reason to buy mainland consumer stocks.
The story sounds right but, despite it all, China's consumer stocks have performed so-so. The MSCI China Consumer Discretionary Index, a benchmark of stocks geared to high-end consumer spending on the mainland, has slightly underperformed the Hang Seng Index since the start of last year. (See chart below left.)
Meanwhile, the turnover of high-profile consumer stocks that listed in Hong Kong last year to much fanfare has been disappointing. Stocks such as Samsonite (1910), Prada (1913) and Sun Art (6808) trade at a fraction of the level seen by a blue chip such as China Mobile (941), as measured in daily Hong Kong dollar trading volumes. (See chart above.)
The China consumer story has stalled somewhat with investors, despite the recent state initiatives and pro-spending rhetoric.
'Boosting domestic consumption has been a big topic for a while, but nothing really happens. So far we have not seen any concrete policies or numbers to support this point,' says Charlie Chen, an analyst for BNP Paribas.
Indeed, markets barely reacted to Beijing's March 5 announcement that it was promoting the consumer economy, or the news of Consumer Promotion Month. The MSCI consumer index traded no better or worse than the overall market. Consumer stocks barely budged.
Why is that?
Wendy Liu, head of China research, RBS Asian Equities, says the mainland's consumer economy is overly dependent on the wealthy elite. The segment is responsible for most of the sales growth.
But to make domestic demand properly driven, the base of spending needs to be much wider, she says, adding that will require deep reforms aimed at redirecting income away from the rich and state-owned enterprises.
'High-end consumption has been growing at a faster pace than general retail consumption. It's a by-product of income and wealth inequality ... There are a lot of rich guys who don't know where to spend their money,' she adds, citing demand for Maotai, an expensive Chinese liquor (or, indeed, diamond studded Hermes belt buckles).
Liu says that for the consumer economy to hit its next gear, the government needs to spend more on pensions, education and health care, which would give the general population the sense of security they need to start spending on discretionary (non-essential) items.
Programmes like Consumer Promotion Month 'are just tinkering on the edges', says Liu. 'You need a rethink about how to redivide the pie, so the low-income residents will be able to be spend.'
There are signs of movement in that direction. Officials have, for example, supported rapid wage growth. Income levels are rising about 15 to 20 per cent per annum in the coastal areas, with clearly positive implications for consumer spending, says Fan Cheuk-wan, head of Asia-Pacific research at Credit Suisse Private Banking.
Fan adds that the state is looking at cutting personal taxes to give consumers more money to increase their spending power.
'We expect the government to finalise tax reform measures to boost consumption,' says Fan, who expects to hear details of tax cuts in the next few months.
The message for the investor looking to play consumer stocks, then, is to look for large-scale structural reforms that will get all mainlanders spending. This, say economists, will power the next wave of the consumer boom.