CHINA. Moody’s Investors Service has cut its rating on China’s debt for the first time since 1989, and the country’s luxury industry could be impacted, according to a report in Jing Daily.
The credit agency expects economic growth in the country to fall to +5% in coming years, while the government’s debt level will possibly edge up to 40% of GDP by 2018 and 45% by 2020.
Jing Daily noted that China’s debt troubles started with the 2008 global financial crisis when China went on a spending spree building highways and real estate developments. The country relied on debt to finance its growth, a practice that continued after the worst of the crisis was over, the report said.
The Moody’s downgrade “is clearly not a good sign” for the country’s luxury industry, Jing Daily reported Luca Solca, Head of Luxury Goods at French investment firm Exane BNP Paribas, as saying. It “possibly confirms the impression that China is past its macroeconomic peak”, he said.
Jing Daily noted that the impact on the Chinese luxury market would depend on how the economic weakness cited by Moody’s affected consumer spending and general sentiment in the country.
“Consumer spending in China was not immune from the country’s economic slowdown in 2016, as income growth moderates,” consulting firm Euromonitor wrote in a note earlier this year.
However, Solca said that “rating agencies downgrades have been in the past more of a trailing indicator, than a leading indicator” and so shouldn’t have an immediate impact.
“Over the past year, the luxury market in China has overall experienced a rebound from losses in previous years thanks to a combination of supporting factors, including an expanding middle class, rising incomes and rapid urbanisation,” said the Jing Daily report.
“According to data compiled by Exane BNP Paribas in a January investors’ report, there has been a general pick-up of luxury consumers’ demand on a quarter-by-quarter basis in 2016, both domestically and internationally.
“Domestically, in China, the second quarter of 2016 saw +5% growth, the third quarter +15%, and the fourth +25%. Internationally, consumer demand fell in the first and second quarter, but the trend reversed in the third and fourth quarters when it grew by +5% and +15%, respectively.”
Solca predicted that the downgrade would not affect international luxury brands’ plans to enter or expand in the Chinese market in the short run.
“Overall, it looks like the Moody’s downgrade will have little immediate impact on the luxury market in China,” the Jing Daily report concluded. “The same Euromonitor report forecasted that luxury goods in China would be the seventh fastest-spending category in 2017, while Exane BNP Paribas expected China and the Chinese to make a healthy contribution to the growth in global luxury spending this year.”
