China growth slowdown negatively affects luxury market sales

China's tremendous growth in the last decade has been the hot topic as the rest of the world has looked on in wonderment (and fear). Their phenomenal levels of growth (and the fastest reduction in poverty the world has ever seen) has led to an emerging middle-class which saw a substantial increase in demand for luxury goods. Burberry had the foresight of this potential market expansion while Aquascutum didn't, to their detriment as they went bust in April. However, Burberry and other luxury fashionhouses are facing problems as a large portion of their market share belongs in Asia and China's slowdown threatens their profit-making abilities.

It is interesting to note that China is very big on corporate gift buying. 'Guanxi' (social connections) are an integral part of Chinese society and have been so for many centuries. Businessmen and women often buy potential clients or partners ridiculously expensive luxury goods, like Rolex watches, as an 'investment'. The Chinese value recriprocity and corporate gift buying often speeds up bureaucratic processes, helping to cut through the huge levels of red tape. The slowdown in growth is likely to negatively impact luxury goods sales (due to tighter budgeting regarding corporate gift buying), although as guanxi is such an established tradition, I doubt this will vanish. Instead, it's more likely businessmen and women will substitute to 'less expensive' luxury goods.

China (unlike the US and Europe) has more ammunition to bolster growth. Chinese authorities are taking both monetary and fiscal action and their proactive approach puts China in a better position than the weak US and the sovereign debt-ridden Europe. This does not mean that Burberry and other luxury brands should become complacent, though. Issues that China faces are also of a more deeprooted structural nature, e.g. the real-estate bubble, exacerbated by the problem of persistent land-grabbing by local officials. These are more pressing than the current growth slow-down as they ultimately dictate China's ability for future growth. Thus, the root causes need to be addressed before the effects (ie the slower growth) can be fully tackled.