Diamonds aren’t forever
Don’t expect much stock market news this week.
The four days before Good Friday are much like the last few trading days before Christmas.
The headlines are generally full of fillers.
Same old property stories mixed up with some naughty footballers’ deeds and royal baby watching.
It’ll be the same with the markets too.
There won’t be much direction for the Australian stock market from the US or Europe this week.
Future traders aren’t willing to put the big bets on this week. Instead, they tend to opt for smaller deals to keep the flow going.
That means that without some sort of market shock, most movement in the Aussie market will come based on what’s happening in the Asian markets.
And that’s exactly what I want you to look at today…
It ain’t about gold
Today I want to talk to you about ‘repatriation’.
Now, normally when you read that word in an economics newsletter, I’ll bet you think of central banks bringing home their gold, right?
After all, that’s been a common theme for the past couple of years.
Both Turkey and Hungary have repatriated their gold. Germany too.
Venezuela tried to, but the Bank of England said no.
When it comes to China, however, repatriation takes on a different meaning.
China isn’t trying to bring home its gold.
For many countries around the world, repatriation is about bringing home the yellow metal. China, on the hand, is desperately trying to keep its money in the country.
‘Repatriation’ is about to take on a whole new meaning.
Keeping the cash in the country
The Middle Kingdom’s desire to keep its money in the country isn’t a new concept. It’s something Jim and I discussed almost two years ago now in >Strategic Intelligence Australia.
In fact, in our ‘Sell Australia’ report, Jim explains exactly how China has taken steps to stop capital from leaving the country.
Well, the next step to stop investment capital leaving the country is to stop consumers from leaving the country.
By convincing the wealthy to spend their money within the Chinese economy.
And the only way to do that is with a tax cut.
At the start of the year, Chinese authorities lowered the VAT — a consumption tax similar to our GST — from 16% to 13%.
Part of the tax reduction had to do with reducing the demand for ‘daigous’. That is, the international shoppers who send goods over to China.
By clamping down on these grey imports, authorities could prevent locals buying from overseas.
In addition, the lowering of the VAT was aimed at increasing local consumption.
Basically, the Chinese ‘repatriation’ is about spending inside the country, rather then people flying overseas for luxury shopping sprees.
Because propping up the Chinese economy is crucial right now.
We’ve seen the well-worn headlines about Chinese gross domestic product falling.
The Chinese government has let billions of yuan run wild through its economy to encourage growth. But there comes a point when only so many planes, trains and buildings can be built.
Authorities want the economy to transition from emerging market to developed. But the only way to do that is to move from being a manufacturing nation to a consumer nation.
That means there’s no point spending money on infrastructure anymore. The government needs to convince people to spend their money locally.
In other words, the tax cut is the new stimulus for the health of the Chinese economy.
However, this ‘repatriation’ may already be failing.
Two French companies explain Chinese economy
Here is a staggering figure for you.
Last year, 33% of all luxury consumer goods were bought by Chinese people.
That’s a heck of a lot of handbags, watches and high-end cosmetics. In fact, some 170 billion yuan (AU$35 billion) was spent on the stuff.
Furthermore, it’s estimated that luxury British retailer Burberry owes 37% to Chinese consumption.
And we can see just how profitable high-ends goods are in companies such as Kering [MC:KER] and LVMH [MC:LVMH]. Kering is the owner of brands like Gucci, Balenciaga and Yves Saint Laurent. LVMH is behind Louis Vuitton, Dior and Fendi.
Since 2015, the share prices of both luxury fashion houses have tripled as the Chinese luxury goods market grew 20% every year.
And investors can thank a millennial for that.
According the South China Morning Post, this demographic are keen to spend their parents’ money on Western status symbols.
While growth in luxury goods has been impressive, it’s tipped to halve this year. At best, consumption of luxury goods may ‘only’ increase 10% this year.
Look, don’t get me wrong. That’s still a huge number of overpriced handbags and watches being sold.
But analysing what’s happening in luxury goods in China gives us insight into how the wealthy are spending their money in the country.
We know that the Chinese government is trying to increase local consumption. Yet early signs are in that the wealthy Chinese are feeling the pinch.
The slowing Chinese economy is affecting just how much people will spend on frivolous things.
Given that both Kering and LVMH’s share prices are at all-time highs, any fall in earnings from both companies will see the share prices hit hard.
So this week and next, while the news is quiet, watch both companies.
Because the numbers of Gucci watches and Fendi bags being sold will tell you just how well the Chinese economy is going.
Until next time,