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Wealthy Chinese Shift Their Luxury Buying Overseas

Harrods, London
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Harrods, London

Wealthy Chinese are buying more luxury — but not at home.

A report from the Beijing-based World Luxury Association found that luxury spending in China last month fell to its lowest level in five years. Affluent Chinese spent $830 million on luxury goods in China — half of what they spend last year. The month included the important Chinese New Year holiday, which is critical for Chinese tourism and spending.

The report predicts the Chinese luxury market is slowing from double-digit growth to single-digit growth.

(Read more: Why Luxury Brands Are Celebrating Chinese New Year)

But that doesn't mean the Chinese weren't spending. While spending on luxury at home was down, the Chinese spent big on luxury abroad.

They spent $8.5 billion on luxury goods overseas during the month — an 18 percent gain over last year. The report said the Chinese accounted for half of all the global luxury products' consumption during the period and remain far and away the largest luxury consumers in the world.

Such a huge share of the market may not be sustainable over the longer term, of course. Most luxury experts say Chinese consumers will account for about a third of the global market by 2015.

And the overseas spending will drive much of that growth. As we mentioned earlier this month, the Chinese are buying more luxury goods overseas primarily because they're cheaper. The Chinese are also traeling more and they prefer buying luxury brands overseas because there is less likelihood of fakes (presumably they're buying more on Fifth Avenue and the Champs Elysees than along Manhattan's knock-off row, on Canal Street.)

Hong Kong, Taiwan and Macau are still the most popular markets for Chinese luxury shoppers but about one in five Chinese consumers are now buying luxury goods in Europe (mainly Paris) – a share that's doubled over the past two years, according to reports from McKinsey & Co. and KPMG.

A smaller but growing share of Chinese consumers is buying goods in the U.S., including New York and Los Angeles, the reports show.

The high costs of luxury goods in China is due mainly to stiff government taxes, which can range between 20 percent and 70 percent on some luxury goods. A designer bag can cost 40 percent less in Paris, for instance, than in Shanghai. While the government may be considering a reduction in those taxes, a report from McKinsey called "Luxury Without Borders" predicts that the Chinese appetite for luxury abroad will continue.

(Read more: What Do Wealthy Chinese Women Want?)

"The price gap is likely to remain substantial in the next two to three years," the report said, "and assuming it does, Chinese spending on luxury goods will grow about as fast overseas as it will domestically."

McKinsey said the migration of Chinese luxury spending makes it even more important for luxury retailers to maintain a consistent image in China and abroad.

Marc-Andre Kamel, a retail and luxury expert at Bain & Co. said luxury companies are also installing special payment systems for Chinese consumers and adding more salespeople who speak Mandarin.

He cautioned, however, that the big flagship luxury stores in Paris and other Western cities need to be careful of the long lines and crowd problems associated with an influx of Chinese tourists.

"They need to be mindful of their other customers, as well," he said.

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  • A reporter and editor, Robert Frank is a leading authority on the American wealthy for CNBC.