Watch Economic Observatory / Has the Chinese bubble finally burst? Will it bring about a dramatic change in the watch market?

Contrary to popular expectations, the Chinese economy has not recovered as expected. Looking back, the Chinese economy has saved the global economy every time it has faced a recession, but things seem to be different after the COVID-19 pandemic. Now that the slowdown in the Chinese economy has become more apparent, leading economic journalist Tomoyuki Isoyama analyzes and considers its impact from various angles.

Is the Chinese bubble finally bursting? Will it bring about a dramatic change in the watch market?

　The slowdown of the Chinese economy is becoming clear. The National Bureau of Statistics of China announced on July 17 that the second-quarter (April-June) gross domestic product (GDP) growth rate, seasonally adjusted, was just 0.8% compared to the previous quarter (January-March).

　Chinese statistics mainly publish figures compared with the same period of the previous year, which would put the real growth rate at 6.3%, but this growth rate does not reflect the actual situation, as the economy was frozen a year ago due to the lockdown in Shanghai. Growth in the first quarter of this year (January to March) was 2.2%, so the current growth rate of 0.8% indicates that the economy has suddenly slowed down.

　There had been hopes of a recovery in consumption as a reaction to the strict zero-COVID policies, but it has recently slowed rapidly. Behind this is uncertainty about the future of businesses and households. Of the private sector companies that employ 80% of the workforce, 28.1% were in the red at the end of May, the highest level ever. As these unprofitable companies have significantly cut back on hiring, the unemployment rate for young people (aged 16-24) in June reached 21.3%. However, this figure only covers young people in urban areas; some believe that if people from rural areas who have come to work are included, the overall youth unemployment rate could exceed 40%.

　Concerns about the future due to unemployment have led to an increase in savings rates, while consumption has plummeted. The consumer price index is also growing at zero percent, and some economists have begun to point out that "we may actually be in deflation."

　At the end of June, the Wall Street Journal published an article titled "Chinese Consumers Shift to Domestic Brands, a Challenge for Western Brands." Concerns are growing that a disruption in Chinese consumption, which has supported Western luxury brands, could have a negative impact on the global economy. U.S. Treasury Secretary Janet Yellen stated the following in a July 17 interview with Bloomberg Television:

"Many countries, especially those in Asia, depend on strong Chinese growth to fuel their economies. A slowdown in China's growth could have some negative impact on the United States."

The impact of declining consumption on the luxury watch market

　This decline in consumption is likely to affect the direction of the luxury watch market. According to statistics from the Federation of the Swiss Watch Industry, the cumulative value of Swiss watch exports to mainland China from January to June was 1.392 billion Swiss francs (approximately 228 billion yen), a 25.4% increase compared to the same period last year. However, this is compared to the period when Shanghai was under lockdown, and is down 7.2% compared to the same period in 2021. If consumer purchasing continues to decline in the future, it is possible that mainland Chinese dealers will refrain from importing goods.

　Furthermore, as the Xi Jinping administration tightens its grip on the wealthy, the trend of transferring assets overseas is said to be accelerating. If the wealthy, who have supported the purchase of luxury goods up until now, continue to move overseas, sales of luxury watches in China could slow significantly.

Will the decline in inbound demand also affect the Japanese market?

　This is likely to affect sales of luxury watches in Japan. With the lifting of entry restrictions due to the spread of COVID-19, inbound tourism has surged. According to estimates by the Japan National Tourism Organization (JNTO), the number of foreign visitors to Japan in June reached 2,073,300, a recovery of 72% of the pre-COVID-19 level in June 2019. However, the recovery in the number of foreign visitors from China has been slow, remaining at 23.7% of the 2019 level. The largest number of visitors to Japan in June was from South Korea, at 545,100, followed by Taiwan, at 389,000. The number of visitors from China totaled 208,500, fewer than the United States, at 226,800, and not much different from Hong Kong, at 186,300.

　A major factor behind this is the sharp decline in the number of people traveling abroad due to concerns about the future of the Chinese economy. As is well known, purchases of high-end items by Chinese tourists have been at the core of inbound consumption, so the slow recovery in Chinese visitors is casting a shadow over the future of watch sales.

Tomoyuki Isoyama
Economic journalist and professor at Chiba University of Commerce. Born in Tokyo in 1962. Graduated from the School of Political Science and Economics at Waseda University. Served at the Nikkei Inc. as a securities reporter, deputy chief of the same department, Zurich bureau chief, Frankfurt bureau chief, and deputy editor-in-chief and editorial committee member for Nikkei Business. Left the company in 2011 to go independent. Covers a wide range of political, government, and business figures. His books include "The International Accounting Standards War: Final Chapter" and "The Secrets of Switzerland, the Brand Kingdom" (both published by Nikkei BP).
http://www.isoyamatomoyuki.com/