The upside of China's slowdown

April 18, 2013: 5:00 AM ET

The news that consumer spending growth is slowing in China isn't all bad. Just ask Burberry.

burberry-china-614xaFORTUNE – Plenty of people were expecting an end to the China-led luxury boom last year, but as Burberry's latest sales report suggests, China's consumers are more resilient than many of us think.

On Wednesday, the British fashion house reported better-than-expected sales, thanks largely to strong demand in China and Hong Kong for handbags and the $2,000-plus trench coats the luxury brand is famous for. Sales rose 11% to $772 million in the three months ended March 31. The Asia-Pacific region, particularly China and Hong Kong, led same-store sales growth during the second half of the year.

The strong numbers are surprising in a few big ways: It was less than a year ago that Burberry (BURBY) issued a surprise profit warning and reported its worst same-store sales since the financial crisis. The move last September sent shares plunging 21% in one day and raised worries about a gradual decline in the global luxury market, which has largely been driven by China. With growth slowing in the world's second-largest economy, it was hard to imagine consumers in debt-troubled U.S. or Europe would pick up the slack.

As Burberry's latest sales report suggests, they didn't have to. A recent spate of store openings in China contributed to a recovery in sales growth in the Asia Pacific, the luxury brand's biggest and fastest-growing region.

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True, China' growth overall has slowed down. Earlier this week, it reported GDP grew 7.7% during the first three months of this year, lower than the 8% widely expected. The disappointing results were largely driven by a slowdown in consumption growth, but that reflects less on the strength of China's consumers than the government's efforts to curb corruption.

Earlier this year, Chinese President Xi Jinping launched a campaign to rein in lavish spending by officials and state-owned companies, warning that excessive spending threatened to bring down the ruling Communist Party. He ordered an end to such things as taxpayer-financed banquets and bribes that have been known to come in the form of Louis Vuitton bags.

"We think ordinary consumption demand will remain resilient, but sales of high-end food and beverages, and restaurants could have been hit by the new leaders' frugality campaign … " Bank of America analysts wrote in a report released to clients on Monday.

Analysts expect the government's anti-extravagance campaign to continue weighing on retail sales growth. Burberry might have dodged slower sales this quarter, but the campaign could eventually hit them. Already, LVMH Moet Hennessy Louis Vuitton SA (LVMHF) is under pressure. On Tuesday, the retailer rattled luxury stocks after reporting the slowest growth in fashion and leather-goods revenue in more than three years because of a drop in Japanese tourism and fewer customers visiting stores in China.

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More broadly, slower growth in China could hamper growth across the rest of the world. Despite the positive sales numbers, Burberry Chief Executive Angela Ahrendts warned global markets remain under pressure.

"We expect the external global environment to remain challenging," Ahrendts said.

Nonetheless, Burberry hasn't lost its faith in the strength of Chinese consumers. To boost revenue over the next year, Burberry's new outlets will be weighted toward China and Latin America.

The move might seem curious, but it's perhaps also a sign that companies prefer quality vs. quantity when it comes to growth in China.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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