Why Chinese millennials are willing to max out their cards for luxury goods

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Date
2 Jan 2019

The Chinese dream of luxury brands is largely dependent upon the nation’s millennial and Generation-Z shoppers, whom global management consultants Bain & Company estimated would account for 46 per cent of purchases in that market by 2025.

But what if this promising outlook is partially fuelled by debt?

A recent HSBC survey shows the debt-to-income ratio of China’s post-90s generation (typically born between 1990 and 1995) has reached a staggering 1,850 per cent.

Meanwhile, the average debt this group owes to a variety of lending and credit-issuing institutions is more than 120,000 yuan (US$17,433).

To make a comparison, that is nearly half the debt of US millennials, who on average owe US$36,000, according to latest figures from US financial services firm Northwestern Mutual’s 2018 Planning & Progress Study.

Data released by US-listed Chinese financial lending platform Rong360 indicates that about 85 per cent of applicants for consumer lending in China were born after 1980. A detailed breakdown of the survey shows that 24 per cent of lending applicants were born between 1980-84, 7 per cent in 1985-89, 37 per cent in 1990-94, 12 per cent in 1995-99, and 4 per cent after 2000.

Young Chinese may decide to embrace a life with debt for several reasons. As a group that desires instant gratification, running into debt to pre-own a high-profile luxury item that they will only be able to acquire in the future is certainly acceptable.

Yu Runting, a 26-year-old mainland woman working in a marketing and public relations firm in Shanghai, is one of them. Yu’s monthly net income is only RMB 9,000 (US$1,316) of which some 95 per cent goes on rent, basic necessities and other expenditures.

However, only this year, Yu has bought four new luxury items – Celine’s “Medium Classic” Box shoulder bag (retail price, US$4,400), Chanel’s “Gabrielle” Hobo Bag (US$4,500), Bvlgari’s “Serpenti Forever” shoulder bag (US$2,100), and Tasaki “balance eclipse” gold earrings (US$1,800) – by maxing out four credit cards and topping it off with credit offered by Alipay’s online lending system, Huabei.

Thus far, she has only repaid some of the credit card debt and none of the Huabei loan.

Yu now has about US$8,400 in debt, and her monthly interest payment stands at US$300.

“Everyone working in my company, from receptionists to managers, owns at least two luxury handbags, and I know most of my colleagues at my level borrow to pay for this high-spending lifestyle,” says Yu, who sees it as a common practice in her industry.

When asked if she is concerned about repaying the debt, she says no. “I will ‘beg’ my parents to pay it off for me when I go home at the Lunar New Year in February.”

Yu is highly confident about that scenario because she says she did not ask her parents to buy her a luxury car as many of her friends have.

Yu’s optimism over her debt situation shows how the consumer debt issue in China differs from the West.

“Many of these millennials and Gen-Z luxury consumers are single children using family money,” says Chen May Yee, Asia-Pacific director of the Innovation Group at J. Walter Thompson Intelligence. “And they are free from the practical or cultural constraints of their parents’ generation, who were taught to save, save, save.”

It is fair to say Chinese parents are the ones who are truly powering the luxury consumption of these young shoppers. However, the sustainability of this spending model for luxury brands is uncertain.

“Our hypothesis is that their attitude toward ‘big ticket’ items – housing and automobiles – will be very different from previous generations,” says Pascal Martin, Partner at OC&C Strategy Consultants.

Martin believes many of these consumers will simply give up owning a flat because it is unaffordable. Also, for the same reason, and because alternative shared transport solutions will become more common and convenient, they may be less interested in owning a car.

“As a result, they may have more disposable income to buy nice things for themselves (such as luxury) and enjoyable experiences (such as travel and cruises),” Martin says. “If so, there is a high probability that they will carry on with their high spending habits as they come of age.”

However, JWT Intelligence’s Chen cautions that while it may be sustainable in the near term, beyond that, it’s hard to say.

“I don’t think luxury brands can take anything for granted these days, and I am sure they are not,” Chen says.

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