Reality dawns on the China-growth myth

The days of making easy money in China are numbered, says Merryn Somerset Webb.

We've written frequently about our concerns for the share prices of luxury goods companies here. We've been a bit early on it. But looking at the recent news, you do have to wonder how much longer the myth that there is easy money to be made in China can continue.

The recent trial of Bo Xilai has laid pretty bare the level of corruption that has allowed the Chinese elite to live stunning lavish lives over the last decade or so. We have heard about how Bo Xailai's son Guagua spent more than $150,000 on a private jet to take him and five friends on a trip to Africa, about how he flew 40 Harvard classmates to Beijing for a jolly, and of the Rmb4m (£420,000) spent on international flights in a mere eight years.

But the exposure of this kind of thing and the reminders that there are legal penalties for corruption should the authorities care to impose them isn't exactly much good for conspicuous consumption in China. Add that to the economic slowdown (and in some places, crash) in China and you might wonder how luxury sales can keep rising across the country. The answer is that they can't.

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I write a bit about this here, but it is worth adding a few more points from the note I refer to in that column. According to Anne Stevenson Yang of Hong Kong-based J Cap*, she was told by the Shanghai luxury industry association that sales across the board are down "20-30%" this year. Most individual retailers told her the same.

Her most recent visit to the city of Ningbo, and the direct interviews she did there, showed "plummeting sales of luxury products from fashion to wrist-watches, liquor to autos" with gold jewellery being the only outlier in terms of sales (they are rising**). But if things are so bad, why are the numbers still so seemingly good? Because the "incentive system of corporate managers is heavily weighted towards showing growth at the cost of margins, sustainability or even accuracy."

Managers know that share prices rise with accelerating sales, so as is the case with the government, "the target will be met, one way or another." That's why passenger vehicle sales in China were reported as being up 13.8% in the first half of this year, but every dealer Stevenson Yang talks to "has seen sales fall, especially since May."

The gap is in inventories some dealers are carrying four to five months of inventory, and Jaguar and Land Rover have actually reported that their dealers are holding three months-worth of inventories. It wasn't that long ago that there were long waiting lists for those who wanted to buy luxury vehicles in China. I don't think we will see their like again for a while.

*Anyone interested in more of this kind of info on China (and an institutional investor) should think about signing up here.

**China bought 272.7 tons of gold in the second quarter, a rise of 87% on the previous year.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.