Duty-free market fuels China’s “dual circulation” growthJuly 29, 2022 / By
Due to high unit prices and tax rates imposed on luxury goods in China, the difference between duty-free and taxed items is significant, attracting consumers with cost considerations. Thus, duty-free business in China is essentially a form of high-end retail.
Before the pandemic, Chinese consumers were major contributors to global luxury consumption through international travels. Today, consumer demand remains strong with the continuous growth of national disposable income. However, the internal circulation of China’s consumption spawned by cross-border travel restrictions has shifted luxury sales from international to domestic.
Meanwhile, China’s 14th Five-Year Plan proposes to develop the duty-free market in the consumer sector. The proposal highlights the Chinese government’s determination to build more consumption destinations at par with global peers. In the meantime, high-end consumer brands continue to expand in China, creating new opportunities for the duty-free market. In the past two years alone, CDFG Sanya International Duty-Free Shopping Complex in Hainan Province has become China’s largest sales volume shopping mall. Offshore duty-free shopping in Hainan is vigorously driving the overall growth of luxury consumption in China.
Simultaneously, from the launch on April 20, 2011 to present, the Chinese government has continuously adjusted and released new policies on offshore duty-free shopping. The policy changes have gradually refined the regulations, in regard to shopping limits, target customers, product varieties, and shopping experiences.
Table 1: Offshore Duty-free Shopping Policy
Source: Ministry of Finance of the People’s Republic of China
According to Haikou Customs statistics of Hainan Province, the total sales of the 10 offshore duty-free shops in Hainan reached 60.2 billion yuan in 2021, with a year-on-year increase of 84%. The numbers are still maintaining a positive trend. Since the beginning of this year, the offshore duty-free shops in Hainan have successively launched a series of consumer promotion activities. Several luxury brands have introduced new products, opened new stores, and cultivated the market with themed events and diversified promotions. Such strategies have greatly stimulated the enthusiasm for domestic luxury consumption.
Moreover, the General Office of the State Council report, Opinions on Further Unleashing Consumption Potential and Promoting Consumption Recovery, clarified that duty-free policies would be further refined. The report, issued on April 25, 2022, also mentioned that the construction of urban duty-free shops would be sustained. As a significant part of the 14th Five-Year Plan outline, duty-free shops will be one of the measures to promote the healthy and sustainable development of consumption formats. Domestic department stores, cultural and tourism organisations and real estate companies are also working jointly to apply for urban duty-free licences. With CTG Guangzhou North Station Duty-Free Complex now under construction, other cities, including Shenzhen, Chengdu, Wuhan, Changsha, have successively unrolled plans to set up urban duty-free shops.
Ultimately, the development of the duty-free consumption market is likely to accelerate. According to China Duty-Free Group, the total consumption of duty-free goods in the country is expected to increase to 614 billion yuan by 2025, and Chinese consumers will contribute 65% to the total growth of global duty-free consumption. Under the domestic and foreign dual circulation, the potential of consumption returning to the country is prominent.