China

Lavish spending drives greater wedge in rich, poor

By Bai Ping (China Daily)
Updated: 2010-08-19 17:15

BEIJING - While most Chinese are worried about rising food prices, China's nouveau riches have also found it more costly to join the country's club of the rich.

Luxury property prices rose 45.1 percent year-on-year in June, with a 750 sq m villa in Shanghai costing 71 million yuan ($10.44 million), a jump of 90 percent in value over the past year. Meanwhile, a Rolls-Royce Phantom sold for 9.2 million yuan ($135,000), up 12 percent, and a bottle of Louis XIII now costs 17,580 yuan ($2,585), a hefty increase of 17.4 percent.

According to the Hurun 2010 China Luxury Living Index, based on a basket of 59 luxury goods and services, luxury retail prices rose by 11.3 percent, doubling last year's figure, and 8 percentage points higher than the CPI, which grew 3.1 percent year-on-year in May.

"It is getting more expensive to buy one's way into China's elite inner circle," said Rupert Hoogewerf, who compiles the China Rich List.

He believes demand, driven by more wealth creators looking for sophisticated luxury products, is far outstripping supply, hence the higher threshold for rich Chinese to pursue a luxurious lifestyle in China.

People with greater purchasing power are perceived to have more status. So the rich buy socially visible possessions such as luxury cars, cigars and wines to indicate their higher social standing.

And affluent Chinese are mostly the newly rich and high achieving professionals, who, as new members of the swelling upper-middle classes, tend to seek status through lavish spending.

Zheng Xin, a dealer who specializes in Mercedes-Benz vehicles in eastern Beijing, said that he and his colleagues have been seeing quite a few local farmers who have become rich after they sold their land to developers amid the present real estate boom.

"They would volunteer to tell us that they have lots of more cash sitting in their bank accounts, as if they were afraid of being looked down by us," Zheng said.

Status-seeking has also turned executive business education into a snob good, as business schools take advantage of rich students' concerns about the exclusivity of their training. For example, according to the index, fees for the Tsinghua University Executive MBA continued to outperform, rising to 450,000 yuan ($66,000), up 18.4 percent compared with last year and from 250,000 yuan ($36,700) in 2006.

You may shrug off status-seeking spending as only a rich man's folly or a personal choice. But economists have argued that conspicuous spending is wasteful because people may buy expensive goods or services to advertise their social status, not because of the intrinsic utility of these purchases.

Besides setting off a wasteful competition for status, conspicuous consumption makes others feel less successful, further widening the social divide between the have-mores and have-nots.

In the United States, intense competition for social status has somewhat led to higher personal bankruptcy rates and a higher incidence of divorce.

In China, the widening gap between the rich and poor has been one of the major causes of social discord. There have been frequent tragedies during which "failures" - poor people who have become desperate as they see no hope in their lives - take revenge against their neighbors or strangers.

The Hurun Wealth Report 2010 estimates that there are now 875,000 individuals in China with personal wealth of 10 million yuan ($1.47 million), up 6.1 percent over the past year, and 55,000 individuals with 100 million yuan ($14.7 million), up 7.8 percent.

But in a relatively well-off city like Beijing, the average urban resident's disposal income was just about 26,700 yuan ($3,900) in 2009. The net income of a rural person was far less, about 12,000 yuan ($1,760).

Try to imagine the frustration of the average Wang or Li in the city if they know their yearly take-home pay would be worth just a bottle of Richard Hennessy or less than two bottles of 30-year-old Moutai, two alcoholic drinks favored by the rich and whose price changes are monitored by the Hurun luxury index.

China Daily