China cracks down on $7.6bn "grey" luxury goods market
To boost the domestic luxury consumption market and raise tax revenues, China is stepping up efforts to crack down on the “daigou” market, where “personal shoppers” based overseas buy luxury goods for Chinese customers at a mark-up but for less than the cost of the purchase at home. The goods are then sent to China and evade import taxes. In January, consulting firm Bain & Co estimated that this “grey” daigou market was worth $7.6bn in 2015. However, as we noted last week, the Chinese Government has raised taxes on packages ordered from abroad and it has now also increased penalties for false declarations and tightened customs controls to clamp down on daigou who “smuggle” in suitcases full of luxury items to sell in China, either in person or online.   

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CHINA is raising fees on packages ordered from abroad and cracking down on “smugglers” who carry in suitcases full of luxury goods, in a concerted effort to encourage domestic consumption and squeeze a grey market used to avoid tax.

Although Chinese shoppers account for a third of global sales of luxury goods, sales that actually take place on China’s mainland account for only a fifth.

The rest are purchases made abroad — either ordered from foreign websites, bought by Chinese tourists, or smuggled in by “personal shoppers” known as daigou, who fill suitcases with luxury items and sell them back home in person or online.

That costs China tax revenue, and discourages the domestic consumption sector, particularly for higher quality goods, that the government has long been trying to boost to rebalance its economy away from exports.

“China wants to attract the outbound purchases back and cultivate a domestic luxury consumption market, which is consistent with the target to develop a consumption driven economy,” said Yating Xu, an economist for HIS Global Insight.

Luxury items like the latest Dolce & Gabbana bag can be about 50 percent cheaper in Milan or in Paris than on China’s mainland, although some brands like Chanel lowered Chinese prices last year to close the gap.

Some Chinese also prefer to buy expensive items abroad because they can be more certain they are genuine, and can get a better choice than at home.

Luxury firms have invested in opening boutiques in China, but they sometimes sit idle, potentially damaging their brands.

According to consultancy firm Bain & Co, luxury consumption on China’s mainland fell 2 percent last year, even as purchases by Chinese buyers rose 251 percent in Japan, 31 percent in Europe and 33 percent in South Korea.

The parallel market, mostly conducted online, is crowding out bricks-and-mortar shops, said Roth Lai, deputy editorial director at Elle China.

“E-commerce has become really the main driving force in the luxury goods market in China, but I think the Chinese will continue to buy outside of China for the foreseeable future, until there is a major shift in economic structure in China,” he said.

The government has increased penalties for false declarations and tightened customs controls. Officials are catching more and more travelers at the airport with suitcases full of luxury goods and slapping taxes on them.

From Friday, higher taxes will come into force on a range of goods either imported via the Internet or carried in by daigou.

Tariffs on watches ordered from abroad will double to 60 percent, while those on jewelry will rise 5 points to 15 percent.

“We expect an adverse impact on overseas purchases by Chinese daigou and tourists alike,” said Exane BNP Paribas analyst Luca Solca.