This Chinese Law — Not the Trade War — Is Beginning to Hurt Luxury Brands Abroad

Over the past decade, luxury brands have benefited from a boom in Chinese tourists’ shopping abroad, but new regulations that went into effect on Jan. 1 appear to already be putting the breaks on some of this growth.

The laws target the cross-border shopping practice of daigou — independent agents who buy goods abroad and resell them at home for less than they would cost in stores, avoiding the country’s steep taxes. As of the beginning of this year, daigou are now required to register with the Chinese government, obtain a business license and pay taxes on imports that exceed the duty-free limit of 5,000 yuan ($743), part of the administration’s efforts to encourage domestic spending.

New data from the Japan Department Stores Association suggest that the crackdown is already taking a bite out of revenues. Duty-free sales at department stores fell 7.7 percent in January, compared with the same period last year, and average spending per shopper fell 8.4 percent to 63,000 yen ($567). The drop was the first the country has seen since 2016, when China raised its import taxes.

“On top of the slowing Chinese economy, due to the U.S.-China trade war, restrictions on duty-free products [in China] have tightened since the beginning of the year,” reads the retail association’s report, referring to the country’s slowing GDP growth and the ongoing tariff tensions between President Donald Trump and Chinese president Xi Jinping.

An estimated 1 million people worldwide work as daigou, and the market for luxury goods alone is worth between 34 billion and 50 billion yuan ($5 billion to $7.4 billion), according to a 2015 report from consulting firm Bain & Co. For those caught breaking the new laws, the penalties are steep: E-commerce and social media platforms can be fined between 500,000 yuan (about $75,000) and 2 million yuan (nearly $300,000) if they fail to adequately police the practice, and individual sellers can face jail time in serious cases.

According to the Boston Consulting Group, Chinese consumers purchased $121 billion worth of luxury goods in 2018, or about 32 percent of the worldwide total. This share is estimated to grow to 40 percent by 2024.

While the Chinese government has added extra hurdles for those who wish to continue reselling foreign-bought goods, it has also eased regulations around e-commerce, raising the annual duty-free allowance for online purchases to 26,000 yuan ($3,865), from 20,000 yuan ($2,973).

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