China import tax cuts no remedy for retail slowdown

Chinese shoppers do about 70% of their luxury spending abroad because of high prices at home

China's economic policymakers clearly didn't consult mother-of-one Chen Xuejun when they decided to try stimulating consumer demand by slashing import tariffs on sneakers to skincare.

The 28-year-old speaks for many Chinese shoppers when she says the move last week won't make her shift her purchases back home from overseas, suggesting the economic upside may be less than Beijing has bargained for.

"Even with the tax cuts and discounts, it's still not as good value as buying abroad," said Chen, a worker at a state-owned enterprise in Shanghai. And anyway, she said, quality and design were just as important as price.

 

The tariff cuts, effective from June 1, are the latest in a string of measures to stimulate domestic consumption and bolster economic growth, which hit a 24-year low last year. Private consumption now accounts for over half of China's GDP growth, but lags far behind levels in markets like the United States.

A Reuters analysis suggests shoppers may be right to be sceptical. High Street prices of imported goods can be about 40% higher in China than overseas, and data shows the tariff cuts are unlikely to make much difference.

Indeed, even after an average 50% cut in import duty, retail prices for skincare products will actually fall by less than 2% and diapers just over 3% - pocket change for China's almost 1.4 billion consumers.

Such price falls will barely scratch the mark-up Chinese shoppers pay on certain products. A 30 ml bottle of L'Oreal SA skincare product Lancome Advanced Genefique costs 780 yuan ($125.79) in China, between 40% and 60% more expensive than in Hong Kong, France and the United States.

"We understand the policy will have limited impact on retail prices," said a China-based spokeswoman for cosmetics firm Estee Lauder Companies Inc , adding the firm would respond to the move by adjusting its prices in the market.

French cosmetics giant L'Oreal and Korean brand AmorePacific Group, which will both adjust China prices, said the move may have a positive impact on domestic sales.

HARD BARGAINS

High prices mean Chinese shoppers now do about 70% of their luxury spending abroad, according to Bain & Co, driving the global market even as domestic luxury spending slows.

But those prices stem from more than just steep import taxes. The lion's share of the mark-up comes from the 17% VAT, distribution and department store costs, according to a price breakdown compiled for Reuters by consultancy SmithStreet.

"It's a good sentiment from Beijing, but the impact on the price consumers will actually see is going to be diluted," said Robin Kerawala, the firm's Shanghai-based co-founder.

Retail prices of smart Western-style suits, fur clothes and boots would fall 3% to 6% even after import tariffs are slashed in half, the analysis showed.

Companies are eager to cool talk of lower prices, saying many of the goods they sell in China are already made locally.

"The majority of our products sold in China is also being produced in China. Therefore, the reduction of the import tariffs does not have a direct impact on our business," said a spokeswoman for Nivea owner Beiersdorf AG .

U.S. firm Kimberly-Clark , which makes Huggies nappies, said the majority of the diapers the firm sold in China were made in the country. Rival Procter & Gamble Co said it was currently "evaluating" the situation.

"It depends how much lower the prices really go, but if prices are still 5-10% cheaper abroad then I think I would still buy any more expensive items overseas," said Yang Jiaqi, 22, a student in Shanghai.

($1 = 6.2008 Chinese yuan renminbi)