Business

China crack down on luxury goods at customs alarms investors, makers of high-end goods

Bloomberg

Social media reports that China is cracking down on travelers returning home with suitcases full of luxury goods have alarmed investors in companies ranging from Shiseido Co. to France’s LVMH and Kering SA.

Shares of the fashion and cosmetics giants plunged as videos of border guards looking for imports over the duty-free allowance of 5,000 yuan ($727) spread on the web, adding to jitters stemming from a trade war with the U.S. Meanwhile, a traveler’s customs receipt that’s being shared widely on social media shows a customs levy of 60 percent on some cosmetics.

Chinese consumers make up the lion’s share of growth for the luxury business and account for roughly a third of the industry’s sales, according to consultancy Bain. Many do the bulk of their high-end shopping during visits to Tokyo, Seoul, Paris and other tourist destinations, where prices are lower than at home.

Any stepped-up enforcement may be aimed at cracking down on the practice known as daigou, when Chinese tourists sell luxury goods acquired overseas at a profit when they return, according to analysts at JPMorgan. They said such imports from South Korea — representing perhaps 1.5 percent of global luxury sales — may have been the main target.

Shiseido declined to comment on reports of customs scrutiny.

Investors in luxury companies were already nervous about the sustainability of the boom in Chinese demand for their handbags, dresses, shoes and cosmetics as a trade war between the U.S. and the Asian nation intensifies.

“We see cosmetics and toiletry share prices remaining vulnerable to China-related news because Chinese consumers account for a higher ratio of sales growth,” Jefferies Group LLC analyst Mitsuko Miyasako wrote in a note to investors.

The sell-off followed a China National Radio report quoting a Shanghai customs official as saying Chinese citizens returning from overseas trips should declare goods if they exceed travelers’ tax-exempt amounts. There’s widespread speculation on social media that Shanghai’s Pudong Airport recently stepped up checks on goods purchased overseas, said the report, which came amid a weeklong holiday.

There haven’t been any official policy changes recently, the customs agent said in the report. China’s customs administration did not immediately respond to a faxed request for comment sent during the country’s national holiday.

Chinese shoppers have taken to social media to decry the customs crackdown. One photo circulating on WeChat showed a tax receipt issued by customs at Pudong on Sept. 28 to a traveler surnamed Wang in which the shopper was slapped with 17,100 yuan in import taxes on Tom Ford lipsticks, SK-II skincare products and other goods from La Mer and Sulwhasoo.

The traveler was assessed taxes of 30 percent to 60 percent for the items and was levied the highest rate on 10 Tom Ford lipsticks, according to the receipt. Those duties are in line with published rates on China’s customs website.

Tougher border controls have been in place since 2015, and recent customs scrutiny has probably focused on travelers from South Korea, analysts at JPMorgan said in a note. Price differences on luxury goods between China and abroad have eased, they said, reducing the incentive for Chinese tourists to buy while traveling.

If a trade war intensifies, European stocks in the sector could fall 30 percent under a worst-case scenario, analysts at UBS Group AG said in July. After surging over the last year amid runaway demand for Gucci’s designs, Kering has fallen almost 15 percent since mid-June, for example.

Any crackdown on unauthorized imports of Louis Vuitton totes and Gucci loafers could lower luxury conglomerates’ incentive to concentrate spending in the brands’ most profitable flagship stores, known for lines of Chinese shoppers waiting outside their doors.

Tightened border enforcement “could be phase 2 of China’s efforts to repatriate consumer spending of its citizens,” Exane BNP Paribas analyst Luca Solca said in an email.

South Korean cosmetics makers also continued their slump Friday as investors reacted to a report earlier in the week that said visitors from China declined.

“Data from Japan, Hong Kong, Macau and Korea points to China passenger traffic growth moderating quite significantly in recent months,” Jefferies analysts led by Stephanie Wissink wrote in a note. “Beauty is the No. 1 purchased category by outbound Chinese travelers worldwide, as more than 50 percent make beauty purchases while outside of China.”