The new duty-free hub luring luxury shoppers away from Europe

Walking through the Haikou Meilan International Airport on the island of Hainan, China’s economic malaise is far from sight.

Across thousands of square metres, tourists flock to high-end shops including Burberry, Jimmy Choo and Bottega Veneta.

Excitement surrounding this duty-free island hub has already caught the attention of European luxury retail investors keen to snap up their share of what is known as “China’s Hawaii”.

LVMH, the luxury giant owned by the world’s second-richest man, Bernard Arnault, announced on Tuesday it will build a shopping centre more than four times the size of Bicester Village in Hainan’s southernmost city of Sanya.

The decision by the company comes as wealthy Chinese consumers shun spending splurges in Western capitals.

Around 62pc of luxury spending by Chinese shoppers took place in China in April this year – up sharply from 41pc in the same month in 2019, according to Sandalwood Advisers.

Arnault’s latest move suggests luxury goods retailers are betting that this is a permanent shift.

The shopping centre spanning 28,000 sq metres will feature more than 1,000 luxury brands, including LVMH-owned Louis Vuitton and Dior.

The decision to build the giant complex stands in stark contrast to what is happening across the rest of China’s struggling property sector, where prices have fallen by as much as 20pc since 2021 in some cities.

Near Alibaba’s headquarters in Hangzhou, house prices have fallen by 25-28pc in the past two years alone.

Several analysts have accused Beijing of disguising how bad the property slowdown is, however, luxury retailers are unphased.

“If you are not in Hainan, you are missing something very, very big,” says Andrew Maag, the former chief executive of British luxury goods brand Dunhill.

The Chinese government has deliberately been pushing the island to become a tax-free shopping hub to lure in big spenders. It also made it a free trade port in 2018.

“Hainan is a phenomenon of Chinese long-term planning and urban development,” Maag says.

“Few governments would ever have the capability to execute a long-term strategic plan like what the Chinese government has been doing with Hainan over the last decades, and their plan for continued development reaches on to 2050.”

Even while China’s prolonged zero-Covid policies dragged down the economy, Hainan proved a bright spot.

Sales were 203pc higher in Hainan’s duty free malls in spring this year than in 2019, according to Sandalwood.

Brands including Gucci, Chanel and Cartier have all flocked to the island.

High-end car makers like Mercedes, Benz, and Audi have also opened showrooms with tailored services for the influx of deep-pocketed consumers.

Maag says Hainan has been created to rival tourist hotbeds in Hong Kong, Singapore and Dubai.

“Hainan is sure to achieve its goal of global influence with full implementation of zero-tariffs on the entire island which apply to import duties, import VAT and consumption tax,” he says.

Unsurprisingly, the British government is watching closely after its controversial decision to abandon tax-free shopping.

Tom Duke, the deputy director for goods regulation at the Department for Business and Trade, earlier this year shared on LinkedIn that he had been on several trade missions to Hainan since 2018.

He noted that Hainan was expected to reach 100 million tourists a year despite the impact of Covid.

“This means fly-in, fly-out models could work, and so duty-free retail, sports events, creative content, hospitality, single medical treatments (and development projects for all the above) have strong potential,” he wrote.

Analysts at Barclays estimate that Hainan contributes up to 15pc of mainland China’s luxury goods market, and a quarter of beauty sales.

“We think that in the long run, Hainan could become the largest luxury shopping and travel retail hub in Asia,” they said earlier this year.

They highlighted China’s decision to triple the annual duty-free allowance to $15,000 in 2020.

Now, the Chinese Government plans to give the island its own tax regime by the start of 2025, meaning retailers operating there would only pay 15pc corporation tax rate unlike 25pc in wider China.

The country’s big bet on Hainan comes as economic growth falters elsewhere, as households reduce spending and property prices sink.

The Chinese government is expected to narrowly reach its lowest growth target in decades this year at 5pc.

A possible indicator of economic malaise emerged recently when the National Statistics Bureau abruptly stopped reporting the unemployment rate for young people aged 16 to 24.

Deutsche Bank has warned that Chinese consumers were the key driver of the luxury sector globally – and even they appeared to be becoming more cautious after an initial post-pandemic boom.

The retreat of the wealthiest Chinese spenders spells trouble for luxury retailers in Western countries.

“We expect European demand to be less supported by US and Chinese tourism than previously,” said Deutsche Bank’s Matt Garland and Adam Cochrane.

Overall retail sales in China are also yet to recover to their pre-pandemic level, as worried consumers cut down on expenses.

But luxury spending, which attracts a more narrow segment of shoppers, was driven by a boom in “revenge” shopping at the start of the year, according to Garland and Cochrane.

Some, including Garland and Cochrane, suggest this surge is past its peak: “We expect Chinese consumers to remain more cautious on luxury spending for the remainder of 2023 and into 2024 given economic uncertainty.”

Even so, the world’s second-richest man is forging ahead to Hainan.

His optimism is echoed by Mr Maag: “[Hainan] is well on a trajectory to be the jewel of luxury shopping for all the major luxury brands in the world.”

For the bruised Chinese economy, the arrival of Mr Arnault and the world’s biggest luxury company to Hainan will provide some welcome relief.