Stimulus Measures May Fall Short in Reviving Chinese Luxury Demand – UBS

Recent stimulus measures from China may not be sufficient to spark a recovery in demand within the nation’s vital luxury market, according to analysts at UBS.

Last week, the Chinese government introduced a series of new policies aimed at bolstering the struggling economy and precarious housing sector. These measures included cuts to interest rates and a reduction in existing mortgage costs.

Additionally, the People’s Bank of China launched a swap program with an initial value of 500 billion yuan to facilitate easier access to funding for stocks for funds, insurers, and brokers. The central bank also committed to providing up to 300 billion yuan in low-cost loans to commercial banks to support share purchases and buybacks by public companies.

Following these announcements, Chinese stocks experienced their strongest weekly performance in nearly 16 years, with positive momentum carrying into Monday.

In Europe, luxury brands such as LVMH, Kering, and Hermès saw their share prices rise in response to the optimism surrounding the economic stimulus, which is seen as a potential relief for lackluster demand in China. This country represents approximately 30% of global luxury sales, as noted by UBS.

However, analysts have suggested that China may need to implement additional measures to ensure sustainable economic support. Data released on Monday indicated that both factory and consumer activity remained weak in September.

The UBS team highlighted the connection between property prices—a critical aspect of China’s economic challenges—and luxury demand, pointing out that around 40% of wealth in China is tied up in real estate, compared to about 30% in the United States.

The analysts stated, “Given the concentration of Chinese wealth in property, this sector may significantly influence luxury consumers’ confidence.” They cautioned that while more details about supportive measures from the government are expected, stabilizing the property market could take longer and require more resources due to excess housing supply and a notable increase in household debt.

Consequently, they concluded that simply providing more stimulus might not be adequate to fully rejuvenate luxury demand in China.