Will the new tax regime on luxury imports pave a way for domestic consumption?

Have you ever thought of Starbucks or Kate Spade as luxury brands? That’s how Chinese people view them, however. If you are drinking Starbucks, you are classy. If you are carrying a Couch purse, you probably will draw the gaze of some housewives.

The tax burden of importing luxury goods (even Starbucks shown above) is extremely high in China compared with other countries. For example, a Kate Spade striped bag on sale is $99 but the price turns out to be more than $300 including taxes in China’s outlets.


Interestingly, Chinese shoppers account for a third of global sales of luxury goods, but only a fifth of sales take place domestically.

The rest are purchases made abroad—either ordered from overseas websites, bought by Chinese tourists, or smuggled in by personal shoppers known as “Daigou”.

The large price discrepancy inside China and outside China and the stereotype of foreign products with better quality gave a birth to a gray market existing among oversea students who fill their suitcases with luxury items and resell them back home in person or online. Why students? They have a legal identity and they want to relieve economic burden from their families.


“It’s really time consuming to be a student buyer but I really earned my living fee every month, said Xinhui Liu, a graduate of USC Viterbi School of Engineering. According to Xinhui, she earned modestly, with a 10% profit from the original price tag in the market. More often, the purchasing agents earn as high as 50%, but the price they give to their customer is still lower than the Chinese market price after taxation.

However, this gray market is getting squeezed. The import duty rate for importing luxury goods into China is 24.5%, the imported value added tax (VAT)is 17%. The new import tax policy released by the Chinese Ministry of Finance, the General Administration of Customs and the State Administration of Taxation came into effect on April 8.  According to the new tariff standard, Chinese tourists bringing international goods worth over 5,000 yuan ($ 748.5) are required to pay hefty tax. Moreover, they would be treated as smugglers if they carry suitcases full of luxury items as before.

In fear of year-by-year domestic demand flow toward foreign goods, Chinese government comes up with raising the import tax higher and higher. But by levying high taxes, it loses tax revenue when it is smuggled back in.

Moreover, my student buyer friends have already come up with methods to combat the increasing import taxes. “It has little impact on my business actually because I use more advanced shipping method now which included tax insurance.”

The act discourages purchasing products internationally. Nonetheless, it stimulates domestic consumption sector, particularly for higher quality goods. China’s economy has relied heavily on net trade compared with the United States.

Will it work? Probably not in the short time. China Consumer Confidence might also be able to tell a story. Understandably, it fluctuated during the past ten years with a peak around 2008 and plummeted in the following year due to the financial crisis. The monthly trend in 2016 shows that China Consumer Confidence goes down in April after the introduction of the new tax regime. In other words, people were not inclined to purchase during that period.



Although the new standard of tariff to import luxury goods might play a role in reforming Chinese industry, it’s not enough. China Consumer Confidence rebounded later in June and July. People are still likely to purchase foreign goods for the sake of quality. Therefore, boosting domestic consumption requires more qualified domestic products combined with supportive policy.

New Trends of Housing Market In July

The marriage between the famous Chinese movie star Baoqiang Wang and his wife garnered much attention recently not only because of their public feuds on Weibo and other personal social accounts, but also their apparently poor housing choice.

This 2,315 square feet house was bought for $1.2 million in December 2013, but the price of this property is estimated $1.01 million, shrinking by 15 percent, according to Zillow, a property website.

They are not alone. The nationwide existing house price in July also fell 1.4 percent to $244,100.

The U.S. housing market, however, has been showing signs of a split personality lately, with existing home sales dipping but new homes sales surging.

Prior Consensus Consensus Range Actual
Existing Home Sales – Level – SAAR 5.570 M 5.520 M 5.420 M to 5.650 M 5.39 M
Existing Home Sales – M/M Change 1.1 % -3.2 %
Existing Home Sales – Yr/Yr Change 3.0 % -1.6 %

Existing Home Sales of July, 2016

Source: Econoday

Home sales statistics are significant because the housing market is a major piece of the economy and its health is indicative of many other factors such as the employment rate.

The national 30-year mortgage rate remained stable and dropped slightly after the second quarter, so it could not explain the falling existing home sales.

Existing home sales

A possible explanation for the trend could be low inventory levels in many parts of the country. “Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month,” National Association Retails chief economist Lawrence Yun said.


Total housing inventory at the end of July dropped to 2.26 million, which was 5.8 percent lower than a year ago, and year-over-year change declined for 14 straight months. Supplies were not sufficient for the market demands.

For new house constructions, the supply decreased by 7,000 from June to July, bringing the July total to 233,000. Monthly supply fell sharply to 4.3 months at the current sales rate from 4.9 months in June. In July last year, this number was 5.2 months.

But new home sales climbed more than 12 percent in July compared to June. More than 650,000 new houses were sold in July. It seemed like lower interest rates and supply worked better in boosting new home sales than existing home sales.

New home sales


What else can explain this different trend between new and existing house sales?

Price could be one factor. The median price of new houses fell 5.1 percent (more than the 1.4 percent decline of existing home price) to $294,600. The price is 0.5 percent lower compared to July last year.

Another change worth attention is the big public builders shift in focus to lower-priced and smaller homes, which the industry calls the entry-level product.

According to the National Association of Home Builders (NAHB) and U.S. Census data, home size is shrinking for the first time since the recession. Median single-family square floor area fell from the first to the second quarter of this year by 73 square feet.

NAHB’s chief economist Robert Dietz said normal post-recession home size would increase because credit tightens and more wealthy buyers rule the market. But recent small declines in size indicate that this trend has ended and size should decrease as builders add more entry-level homes into the inventory.

More first-time buyers consider location, neighborhood and traffic hours more important than home size. Besides, affordability is their priority.