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A worker at a store for French luxury leather goods maker Longchamp adjusts a display in Beijing in a file photo. China was once a gold mine for watch, car and jewellery companies, but a recent government campaign has hit sales of all three. (© David Gray/REUTERS)
A worker at a store for French luxury leather goods maker Longchamp adjusts a display in Beijing in a file photo. China was once a gold mine for watch, car and jewellery companies, but a recent government campaign has hit sales of all three. (© David Gray/REUTERS)

China’s government crackdown echoes through luxury sector Add to ...

The sweet, humid air and colourful stalls of the Laitai Flower Market are a lovely break from the grey, traffic-clogged streets of Beijing. But these days, the mood among its vendors is grim.

The flower market has been badly affected by the government’s crackdown on extravagant consumption, a campaign that played a large role in the surprise slowdown of the Chinese economy in the first quarter.

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“This is the worst I’ve ever seen it,” said Mr. Lu, a 10-year veteran of China’s flower industry, who with his partner is reduced to playing computer games as his stall brims with roses and lilies. “All we can do is endure and try to make it through. Sales to state-owned companies used to be 60 per cent of our whole business. They have been completely wiped out since half a year ago.”

When Xi Jinping took charge of the Communist party late last year, one of his first important acts was to rein in the ostentatious displays of wealth by officials that had angered a public increasingly bitter about corruption and inequality. Mr. Xi ordered government departments to curtail their lavish banquets and to be thrifty on everything from their choice of cars to their overseas travel.

The government has made a policy push to get the broader population to spend more as part of efforts to re-balance the economy toward consumption and away from investment. The drive for frugality in the civil service does not change that objective – in fact it is partly an attempt to put more money in the pockets of ordinary people and give officials less reason to be corrupt.

When Mr. Xi launched his anti-extravagance campaign in December, there was skepticism about how effective it would be in a country that had fast become a gold mine for watch, car and jewellery companies. Four months on, these doubts have melted away.

The impact on consumption throughout the Chinese economy was evident in the latest growth data. Retail sales grew 12.4 per cent year on year in the first quarter, down from a pace of 14.9 per cent in the final quarter of 2012.

The drop-off in the restaurant and catering industry was particularly sharp. Sales decelerated to 8.5-per-cent growth year on year in the first quarter, more than a third slower than the same period a year earlier.

Luxury brands have also been feeling the pain.

Sales of Ferrari and Maserati cars in China fell in the first two months of the year, according to LMC Automotive estimates. Pernod Ricard SA, the world’s second-biggest distiller, is set to report a decline in Chinese sales after years of surging growth. Shares of Hong Kong jewellery chains Chow Tai Fook and Chow Sang Sang have slumped this year on concerns about slower Chinese demand.

Analysts see little hope for reprieve from the spending restrictions, at least in the short term.

“It’s important for a new government to have credibility. So instead of changing the policy quickly, they are more likely to remain steadfast in implementing it,” said Helen Qiao, an economist with Morgan Stanley.

For some investors, it is shaping up to be a painful reminder of policy risks in China. While the Communist party has strayed far from its Maoist roots, officials still go to great lengths to conceal their private wealth and no officials would dare to criticize a campaign against luxury spending.

However, it is not all bad news for companies hoping to sell to Chinese consumers.

In a sign of resilient demand from China’s burgeoning middle class, retail sales signalled a rebound in March to 10.3-per-cent growth year-on-year in real terms after easing to 9.5-per-cent growth in the first two months of 2013.

“China’s consumption is fundamentally very strong because of where we are at this stage in development at the current income level,” Ms. Qiao said.

Sheng Laiyun, spokesman of the national statistics bureau, noted that sales at ordinary restaurants performed very well even as their high-end peers suffered.

“For the food and drink industry, I think this is a great opportunity for businesses to change their structure and their model. They should aim their marketing and their sales at the wider public,” he said at the news conference announcing the data.

In the Laitai Flower Market, at least some vendors are attempting to follow that prescription, giving up hope on their once-lucrative government clientele and looking to new customers.

“We’ve changed to target families, individuals and private companies,” said Ren Shanshan, 20, a saleswoman. “Lower prices, that’s our strategy now.”

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