By: Our Correspondent

Hong Kong’s overcrowded Central district is awash in some of the priciest stores in the world, occupying rental space that costs – in the case of Abercrombie & Fitch in the historic Pedder Building on Pedder Street between Queen’s Road and De Voeux Road – a whopping US$1 million per month in rent.

Not far away, Burberry is paying the equivalent of US850,000 per month according to Bloomberg. Directly across the street from Abercrombie & Fitch, the northwest corner of the Landmark building is fitted out to look like a gigantic Louis Vuitton gift box, paying somewhere near the same amount. A rush of redecoration has left seemingly half the first-floor corners of Central done up to look like gaudy gift boxes, in fact.

Louis Vuitton and others can afford this kind of rent because inside the two-level store, stylishly-dressed saleswomen are selling US$1,000 bags faster than the Watson’s health and beauty store nearby can sell toothbrushes. There are times when the luxury stores have to meter the customers to keep them from overwhelming the staff.

The reason, as everybody knows, is the flood of nouveaux-riches Chinese swarming over the border as a result of the Individual Visit Scheme instituted in 2003 and which was responsible for the arrival of more than 22.5 million Chinese visitors in 2010. Mainland Chinese visitors accounted for 67 percent of retail sales, up 26 percent from 2010 in the first eight months of 2011, according to Bloomberg, and represented the largest group of spenders.

It is hardly news that luxury spending in China has been spiraling upwards for nearly two decades. But just how steep the spiral has been is detailed in a new report by the Beijing office of the Seoul-based Samsung Economic Research Institute. Chinese consumers now constitute one of the world’s largest such markets, spending US$10.7 billion in the domestic market and US$50 billion overseas – the reason Hong Kong’s retailers can pay such gigantic rents.

It has to be said that these conspicuous consumers, however, appear to represent a relatively thin slice of the total Chinese economy. The numbers appear massive because of China’s 1.3 billion population. According to a January 18, 2011 research paper titled The Puzzle of China’s Rising Household Savings Rate, by Eswar Prasad, Kai Liu and Marcos Chamon for the Brookings Institutions, gross domestic savings have actually soared upwards to more than 50 percent of GDP. The household savings component rose from about 14 percent in 1991 to more than 27 percent in 2007 before turning relatively static. In the meantime, the share of private consumption in GDP has fallen to about 35 percent, the lowest among any of the major advanced and emerging market economies, the paper indicates.

Actually, China’s big problem, despite the ostentatious consumption of the select few, is to get consumers to spend. Consumers see the government’s provision of public benefits such as health care, education services,, welfare and housing falling, with younger households attempting to accumulate savings to prepare for their children’s educations, etc. The rising number of China’s elderly, among the fastest-growing proportions in the world, contributes to the propensity to save, with saving rates of those over 60 climbing to as high as 60 percent of income. Saving for house purchases has also soared upwards – as have China’s housing prices despite government attempt to keep a lid on them.

In an indication of just how the weight of numbers in China’s population drive its position in the world luxury goods market, Japan’s luxury market, despite years of supposed economic stagnation and despite a population about a tenth the size of China’s at 127 million, is still larger, at 34 percent to China’s 25 percent as Japanese consumers strong purchasing power holds up. Japan’s purchases of luxury goods are expected to continue to continue to grow steadily over the next five years. The Eurozone ranks third with 16 percent of total luxury goods sales followed by the United States at 15 percent.

It is debatable, however, how long China will remain behind Japan. The domestic luxury market is growing at a 11.5 percent annual pace. They are expected to lead the global luxury market’s annual growth of 20 percent from 2011 to 2015 despite perceptions of a global recession.

In both Japan and China, it’s face – “social distinction,” according to the SERI researchers, rather than personal satisfaction that drives consumer so buy luxury goods. Some 65 percent of consumers in Japan and 64 percent in China say they buy luxury goods to look good in front of their friends, while only 35 percent buy them because they derive personal satisfaction from the purchase. In the UK, conversely, 80 percent of people buy luxury goods for personal satisfaction and only 22 percent for social distinction (there is some overlap from buyers who ascribe more than one purpose). Likewise, although 40 percent of American luxury buyers said they did it for face, 75 percent overall said they bought luxury goods for personal satisfaction.

The ostentatious consumer spending represents a sea change for China, the report says. Prior to its opening to the west and economic reform, the Communist government stressed frugality and saving, with general negative perceptions of excessive spending. Both rural and urban residents had similar lifestyles and consumption patterns. However, as globalization has taken hold, western lifestyles and positive perceptions have spread – although apparently only in a thin slice of the economy.

“The importance placed on reputation and the dominant mob psychology of Chinese consumers have contributed to the rapid spread of luxury goods among the high-income brackets,” the report notes. “In addition, the surging popularity of luxury goods among the high-income and upper class has led to the belief that ‘social status is upgraded via the ownership of luxury goods.’”

While in mature developed markets, it is rich consumers with high social standing and luxurious lifestyles who purchase luxury goods, in China there are actually three types of consumers, according to the SERI report. They are the privileged elite, the middle class and the new generation with their faces pressed to the glass, who want to look like their richer counterparts.

“The upper classes who have strong purchasing power buy luxury goods for their own satisfaction and consider the consumption of luxury goods as a part of their social activities,” the SERI report says. “On the other hand, the middle-class and general public still purchase luxury goods to show off their wealth and blindly follow the consumption patterns of the upper-class.”

Economic growth, a burgeoning middle class, raised awareness of luxury goods as well as rapid urbanization contribute to the steady growth of China’s luxury goods market. Merchants of the world, Rejoice. The East is Red.