Can Chinese luxury goods` consumption save the world economy?

The Chinese Commerce Ministry made an unprecedented announcement late last month on setting up direct sales outlets for luxury goods in more than 20 cities this year. The outlets will be built on a large scale to accommodate more than 30 European and American luxury brands.

In addition, new products of such brands will be released in Europe, the U.S. and China at the same time and same prices. Tariffs on luxury goods, which amount to 30 to 100 percent of the price tag, are expected to be lifted, though Beijing did not elaborate on the matter.

A craze for luxury goods among the Chinese people has prompted their government to make this decision. According to the World Luxury Association, Chinese bought 50 billion dollars worth of luxury goods in Europe last year. The establishment of outlets for luxury goods inside China is a desperate measure to save dollars that would go toward airfare and lodging fees.

With the global economy showing no signs of rebounding, demand for luxury goods is preventing a further slowdown of the global economy, experts say. Despite lackluster consumption around the world, sales of luxury goods have been on a steady rise.

In the first half of last year, Prada saw net profit jump 75 percent year-on-year. Burberry`s sales grew 21 percent in the third quarter last year from the same period of 2010. Rolls-Royce posted the largest sales in its 107-year history last year. The share price of the Richemont Group, the world`s leading producer of luxury goods such as Cartier, rose three-fold last year from the previous year.

Luxury goods producers are paying particular attention to the Chinese market. According to the China Daily on Wednesday, Chinese spent 100 billion yuan (15.7 billion U.S. dollars) on luxury goods last year, up more than 20 percent from 2010, but this figure is only for goods sold in China.

Global consulting firm McKinsey & Co. said China accounted for 10 percent of world consumption of luxury goods (excluding cars and private airplanes) in 2010, and the figure will grow to 20 percent in 2015. Bernard Malek, an analyst at the German consulting company Roland Berger, said, “If this trend continues, China will soon take up 70 percent of global consumption of luxury goods.”

Young people aged 15 to 20 comprise a large portion of the consumer base of the Chinese luxury goods market. In addition, Chinese tend to buy luxury goods for their reputation. With even teenagers racing to buy luxury goods for the sake of appearances, the market will exponentially grow if they reach in their 30s and 40s, according to experts. This is why Hermes and Chanel are setting up stores even in small provincial cities in China.

A rise in the consumption of luxury goods can prop up the global economy because it can help Western countries reeling from the economic downturn. Luxury goods producers refrain from outsourcing the products to maintain brand value. This means higher sales can generate jobs in Europe and the U.S.

Unlike in the 2009 global financial crisis, countries are having difficulty in devising policy measures to lift the global economy out of the latest crisis. This has also led to a change in the perception of luxury goods consumption. While China bought 501 million dollars worth of Spanish treasury bonds to help Spain last year, Chinese tourists purchased a whopping 50 billion dollars worth of luxury goods in Europe.

koh@donga.com