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China’s Turmoil May Stall Rebound in Replica Watch Sales

TAIPEI, Taiwan — After nearly three years of government austerity and slow economic growth, sales of luxury replica watches in China are showing signs of rebound — although many factors, including the recent weakening of the renminbi and stock market turmoil, could stall that momentum again.

In Hong Kong, shoppers stream through a Causeway Bay neighborhood packed with replica watches shop.

Swiss replica watches enjoy a near-monopoly on the luxury replica watch market in China, and also in Hong Kong, which is not subject to mainland tariffs on luxury goods. A popular shopping destination, Hong Kong is also a center for shipping and re-export.

From 2005 to 2012, the value of watch exports to China from Switzerland grew 370 percent, to 1.6 billion Swiss francs, or $1.64 billion, from 351.6 million Swiss francs, according to industry data. During the same period, exports to Hong Kong grew to 4.4 billion francs, from 1.8 billion francs, an increase of 144.7 percent.

Beginning in late 2012, however, Chinese demand for luxury replica watches took a hit. The value of exports to Hong Kong and China combined dropped 7.5 percent in 2013 before stabilizing and contracting 0.9 percent in 2014.

“The slowing demand for luxury replica watches in Hong Kong and China is mainly due to two factors: the Chinese authorities’ crackdown on extravagant gift-giving and more mainland Chinese traveling and buying luxury products abroad,” said Alice Tsang, an economist on the Greater China Research Team at the Hong Kong Trade Development Council.

The renminbi’s recent strength against the weak euro has bolstered Chinese tourism in Western Europe, with concomitant growth in luxury purchases, which are not subject to the import tariffs that are placed on mainland purchases.

A trade agreement between China and Switzerland, which went into effect in July 2014, reduced tariffs on Swiss replica watches by 18 percent in the first year and will reduce them by a total of 60 percent over 10 years. The agreement does not affect import-related taxes, value-added tax or consumption tax, however, preserving some of Hong Kong’s and Europe’s appeal as destinations for watch purchases.

In the meantime, sales in China are rebounding, while exports to Hong Kong continue to lag.

“After a decrease of our exports to China last year, we note a recovery this year, with growth of 5.3 percent for the first half-year,” said Jean-Daniel Pasche, president of the Federation of the Swiss Replica Watch Industry, adding that the group expects the rebound to continue.

But during the first six months of 2015, Swiss watch exports to Hong Kong, still suffering, were down 19.5 percent year on year.

Swatch Group, which, along with Richemont, Rolex and LVMH Moët Hennessy Louis Vuitton, dominate the Swiss watch industry, struck an upbeat note in its 2015 midyear report, released in July. Swatch owns brands including Blancpain, Breguet, Omega, Longines and Tissot.

“Sales in Greater China and other regions will further increase in local currency,” the report said. “For all brands, this growth will be supported by a high level of marketing investment, an expanded retail network and also by the many new product launches in all segments.”

Richemont described mixed performances for different brands in its report for the fiscal year ending March. Sales of Piaget, Vacheron Constantin and A. Lange & Söhne replica watches were weak in Hong Kong, the report noted, although Vacheron Constantin sales were strong in China. Overall the China slowdown was “moderating,” it said.

In general, Chinese demand has been shifting away from the market’s higher end to more affordable purchases.

“Brands such as Replica OmegaRolexLonginesCartier and Tissot, which used to be considered medium-range luxury replica watches, are now top favorites,” said Charlie Gu, a director at China Luxury Advisors, a consultancy that has offices in Paris and Shanghai.

“I think China’s luxury replica watch market is maturing, but with growing pains,” Mr. Gu said. “Despite the crackdown on conspicuous spending by government officials and a slowing economy, the market is still growing.”

In China, luxury replica watches are popular status symbols and were often presented as gifts to corrupt officials by businesspeople hoping to win contracts or approval for projects. The arrival of President Xi Jinping in late 2012 and his continuing anticorruption drive changed that.

“It has definitely put a chilling effect on luxury replica watch sales, as government officials are refraining from lavish spending out of fear. But the initial shock from the top bracket is likely to be absorbed by the growing demand from the middle class,” Mr. Gu said, adding that the market now favors watches priced from $1,600 to $4,000.

Currency movements are also an issue. The floating of the Swiss franc in January did not affect watch prices in Hong Kong, Ms. Tsang said, but the recent weakening of the renminbi against the dollar is likely to have significant repercussions.

“The devaluing of the renminbi means foreign goods become pricier for Chinese consumers in their own currency,” she said. “In the medium term, demand for luxury replica watches may slow down.

A weaker renminbi will also make travel beyond China’s borders more expensive.

“Mainland Chinese may decrease the number of overseas trips they take or buy fewer luxury products when traveling,” she added.

In addition to the renminbi, another major development is introducing uncertainty into the Chinese luxury watch market: the Apple Watch.

Apple initially introduced its smartwatch in nine markets, including China and Hong Kong, as well as the United States, on April 24.

While the company has yet to release its watch sales results for China and Hong Kong, the two markets are believed to be among its top performers, with the Apple Replica Watch Sport version, for example, retailing for as little as 2,728 Hong Kong dollars, or $352.

Since April, Apple’s watch has received plenty of public attention in China — including being spotted on the wrist of a TV news anchorwoman during a broadcast and a new ad campaign featuring Chinese tourists using the watch in Germany and German tourists using the watch in China.

“Apple is already considered a luxury brand by Chinese consumers. The introduction and popularity of Apple’s watch will no doubt increase competition,” Mr. Gu said, noting that LVMH is planning a TAG Heuer-branded smartwatch, scheduled to make its debut in October. “Apple Replica Watch will challenge Swiss watchmakers to come up with a counterstrategy for an evolving consumer lifestyle.”

Mr. Pasche was sanguine about the newest luxury replica watchmaker.

“We do not fear the competition of the smartwatches,” he said. “Swiss mechanical replica watches have been successful in China, and smartwatches may also find success.”