China Takes Aim At Lost Luxury Sales With Duty-Free Development

Chinese shoppers check out handbags at Wuhan's first duty-free store. (CRI)

Chinese shoppers check out handbags at Wuhan’s first duty-free store. (CRI)

China’s ongoing anti-corruption campaign has made it clear that the Chinese government won’t tolerate luxury goods bought as bribes for officials, but several developments in duty-free shopping on the mainland over the past year show that China is hoping to keep the average Chinese luxury consumer buying goods on the mainland.

On December 25, shoppers in the central Chinese city of Wuhan poured into its first ever duty-free shop to stock up on imported handbags, cosmetics, wine, and baby formula powder, according to Chinese media. Located in the city’s East Lake Comprehensive Bonded Zone, a special customs supervision area, the store saw long lines of customers eager to avoid the high tariffs that typically drive consumers to purchase foreign luxury brands in Hong Kong, overseas, or though China’s online “gray market.”

The Wuhan opening was one of several recent significant developments on China’s duty-free front as the country’s luxury market growth has slowed significantly over the past three years. While the country’s ongoing anti-corruption campaign has factored into the slowdown, another major cause has been Chinese consumers’ growing tendency to find ways to avoid tariffs that can cause products to be anywhere from 20 to 80 percent more expensive than they are in other countries. As more than 100 million Chinese tourists headed abroad in 2014, many opted to buy luxury items outside the mainland for themselves, friends, and family, while others headed to Taobao, Tmall, or WeChat to order daigou goods smuggled into the country to avoid customs.

The Wuhan duty-free shop followed the landmark opening of the world’s largest duty-free mall in Hainan this September, which expanded upon a three-year pilot program to attract price-savvy Chinese shoppers to the tropical vacation locale. By giving the go-ahead to open the center, China’s State Council likely hopes that its 300 brands including Burberry, Chanel, and Dior will entice Chinese travelers to stay in China for their vacations rather than take their business to nearby duty-free destinations such as South Korea and Japan.

One of the most significant policy developments in these efforts to keep sales on the mainland takes place in cyberspace as China’s haitao (online shopping on overseas sites) market continues to accelerate. The recent establishment of six e-commerce “pilot zones” in Shanghai, Hangzhou, Ningbo, Zhengzhou, Guangzhou, and Chongqing has given international e-tailers the opportunity to sell goods to Chinese consumers at significantly lower prices than before with much shorter shipping times. In these zones, foreign goods are stored in bonded warehouses, where they are inspected quickly by customs.

While not completely tariff-free, the goods are cheaper than they sell for on the mainland: items less than 500 RMB (around US$80) are duty-free, while orders costing between 500 and 1,000 RMB ($160) are subject to a 10 percent tariff. U.S. retailers including Macy’s, Bloomingdale’s, Neiman Marcus, and Gilt have worked with Alibaba’s Alipay ePass payment system to facilitate sales.

These developments demonstrate that China has taken notice of the sales being lost to overseas and online gray-market shopping for imported goods. As long as tariffs remain high on the vast majority of available goods, it’s unlikely that Chinese shoppers will stop buying through these avenues, but a growing number of duty-free and inexpensive options may help to level the playing field in the future as middle-class consumers seek out luxury bargains.

 

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