In a blow for Hong Kong, global luxury goods companies such as LVMH Moët Hennessy Louis Vuitton (LVMH), Hermes and Richemont are exploring opportunities in China’s Hainan province, as they eye expansion in the world’s second largest luxury market. While LVMH and Hermes were eyeing new stores in the province, Richemont was investing more in Hainan and was planning to expand its local team, according to sources. Any pivot to Hainan will coincide with store closures in Hong Kong and could have a longer term impact on luxury retail in the city. “Luxury brands will likely continue to increase investment into the mainland, especially Hainan, if people still don’t see much hope for the reopening of borders,” said Jonathan Yan, the Shanghai-based principal of consultancy Roland Berger. The impact on Hong Kong will be big, he added. “People from surrounding provinces, such as Guangdong, may continue to buy stuff in Hong Kong. But its total volume of mainland consumers will certainly drop.” The exploration of opportunities in Hainan by luxury companies comes amid an increase in China’s importance to the sector during the coronavirus pandemic. The Chinese global luxury goods market accounted for 32 per cent of all global luxury goods sales last year, and was set to surpass the US to become the world’s largest in five years, according to Euromonitor International. In 2019, the country accounted for 11 per cent of all global luxury goods sales, according to data from Bain and Company. Luxury companies, which recorded strong performances in the first three quarters of this year, were buoyed by demand from China. LVMH, which is the largest luxury brands group in the world and owns labels such as Celine, Givenchy and Christian Dior, saw organic sales of its fashion and leather goods surge 57 per cent in this period from a year earlier. Hermes, which reported “a remarkable performance in Greater China and other countries in Asia”, said sales had jumped 63 per cent in Asia excluding Japan in the period. It also opened its 28th address in mainland China in September. All products sold on Hainan Island will be duty free by 2025, but these luxury companies were unlikely to open such shops before that, contrary to a Reuters report . While Hermes and Richemont did not reply to requests for comment, LVMH said: “Louis Vuitton is exploring opportunities in Hainan. The house is not considering any options within the licensed duty-free market.” Luxury companies might not open free-duty shops on Hainan Island as that could negatively impact their stores in other Chinese cities, said Roland Berger’s Yan. Some luxury companies were opening new offices in the area under local preferential tax policies for foreign companies, as a way of getting more involved in fast-growing region, the sources said. Many had set up specific teams to monitor and study new opportunities, they added. Richemont, which owns Cartier, Van Cleef and Arpels and Piaget, has three job openings listed for Haikou, the province’s capital, on its website. Johann Rupert, its chairman, said during an investors call in May that he was confident that the investment in mainland China, including Hainan, “was worth it and it will become more apparent to everyone over the next two to three years”. Hong Kong, an important shopping destination for mainland Chinese consumers until before the city’s social unrest and the pandemic, has suffered because of travel restrictions put in place by Beijing to contain and eradicate Covid-19. Louis Vuitton and Fendi, for example, closed their shops in the city’s Times Square shopping centre this year amid a slump in traffic and high rents. And a drop in cross-border travel by Chinese consumers led to a 48 per cent surge in domestic sales of luxury products in 2020, Bain said in December last year. Preferential policies in Hainan, including an increase in duty-free shopping quotas for travellers to 100,000 yuan (US$15,697) annually from 30,000 yuan, have accelerated this trend. China aims to establish a free-trade port policy system with a key focus on easing free trade and investment in Hainan by 2025, with the mechanism maturing by 2035. Its development, especially fast growth in consumption, is expected to further benefit from China’s “dual circulation economic strategy ”, which puts much emphasis on growth driven by the dominant role of the domestic market while also balancing its exports.