China should increase the luxury goods tax rate as a way to curb younger generations’ irrational spending on luxury brands, a Chinese official proposed at the country’s annual “Two Sessions” last week in Beijing.
The “Two Sessions,” which typically convenes in the first week of March each year, amasses a group of China’s social, economic and political elite in Beijing to discuss urgent problems the country faces and their potential solutions.
“Our country has become the largest luxury goods market in the world,” said Cui Bo, a member of the National Committee of the Chinese People’s Political Consultative Conference and an official of Northwest China’s Ningxia Hui Autonomous Region, during the conference. “Some Chinese are saving money for a year in order to purchase a piece of luxury goods.”
Cui added, “Some young people have little savings but they are obsessed with expensive luxury products. They borrow to purchase luxury items. This behavior of over-spending turns many of them into a ‘Moonlight Clan.’” The term Cui used (Yue Guang Zu in Mandarin) refers to a large group of people, especially youths, who spend their entire salary before the end of each month.
Consequently, Cui suggested China needs to regulate young people’s luxury consumption and restore a culture of frugality to rein in hedonism and consumerism among the Millennial and Gen-Z generations.
Cui’s proposal points out a serious problem that can jeopardize the sustainability of the luxury industry in China — the consumer credit bubble. The Chinese term that he used to describe the Chinese Millennials’ purchasing behavior may only capture a part of the problem.
The “Moonlight Clan,” spends more than they make, leading to a debt burden. In the luxury consumption sphere, a lot of consumers borrow from various credit-(re)issuing institutions from banks and credit unions to digital lending platforms from Alibaba, JD.com, and Tencent, to cover their continued spending. It is even common for some of them to open a new line of credit in order to repay previous loans.
A survey from HSBC last year shows that the debt-to-income ratio of China’s post-’90s generation (typically referring to individuals born between 1990 and 1995) has reached a staggering 1,850 percent. Meanwhile, the average amount of debt this group owes to a variety of lending and credit-issuing institutions is over $17,433 (RMB 120,000).
Though there is no certainty that Cui’s proposal will become law anytime soon due to China’s complicated rule-making process, it shows that the government has become aware of Millennials’ unhealthy spending on luxury goods. Regardless of whether the government intervenes, the country’s debt-laden Millennials’ consumption pattern is worthy of luxury brands’ full attention.