By Emily Neil
New Statesman
28 March 2013

Xi Jinping makes problems for luxury goods.

A more unusual, but strong, market force is at work in China: an anti-corruption drive led by the new president, Xi Jinping. The giving of expensive luxury items to government officials has been a standard part of bureaucratic and business life in China, and has contributed in part to the dramatic growth in revenues and profits for multinational luxury goods companies operating in the country. Mr Xi however has swept in with a determination to stamp out showy bureaucracy and waste, and high end restaurants have suffered as official banquets have been cancelled and luxury local liquor makers have seen demand drop significantly.

All this will send a shiver through Scotch whisky makers, as well as other luxury goods companies in the UK and Europe. The most recent evidence comes from Pernod Ricard, owner of the Chivas Regal brand, which has seen sales of its Scotch whisky fall by a double digit rate [2] over the critical Chinese New Year period.

Canadean’s local team are also reporting a slowdown in the sales value of red wine, as China’s wine drinkers switch to mid-range brands and the extraordinary growth in demand for top level labels such as Lafite, is finally checked.

Is this a short term blip or a sign of things to come? This partly depends on the strength of will of Mr Xi, and how long his commitment to the anti-corruption campaign lasts. For now, the luxury goods makers who have enjoyed this source of almost unfettered demand, will need to look to the rising income of the average Chinese consumer to drive growth – thus aligning with the government’s aim of middle class enrichment as the next phase of China’s economic growth.