The fact that China’s reopening last year wasn’t the big welcome back the luxury industry had hoped for only means brands can’t afford to take their eye off the ball this year. The economy may now be weakened but its domestic luxury market is almost double the size it was in 2019, with growth projected to outpace that of the US and Europe.

Worth 460 billion yuan ($63 billion), China’s personal luxury market is expected to register year over year growth of 4 to 6 percent in 2024, according to BoF and McKinsey’s latest State of Fashion report. That compares to 16 percent in the first half of 2023 (a large jump from a low base during Covid-19 lockdowns) and then a drop of between 1 percent and 3 percent in the second half.

This year is also “likely to be a tale of two halves” said Matt Garland, analyst at Deutsche Bank Research. The first six months are “likely to be challenging given the further impact of very tough comparable growth to overcome in 2023 (as the country reopened at the end of 2022) before a better growth outlook in [the last six months of the year] if further stimulus and improving macro conditions help to drive a consumer recovery.”

The luxury industry’s success in China mainly hinges on two factors. First, whether aspirational customers who were hardest hit by Covid-19 lockdowns, the property crisis and other economic headwinds will open their wallets again. Secondly, whether Chinese will be willing and able to travel more freely abroad, where they tend to spend a great deal more due to lower taxes.

The list of things that need fixing to turn around China’s weakened economy is long. The country is grappling with deep distress in the housing market, deflationary pressures, risky levels of local government debt, and weakened global demand for its exports. Youth unemployment is at a record high after a regulatory crackdown on tech and education firms which had been big employers of Millennials and Gen-Z staff.

Last month, Moody’s cut China’s sovereign credit rating outlook to negative from stable, citing the growing risks of persistently lower mid-term economic growth. But it is important to remember that an official annual GDP growth target of 5 percent is expected, in line with last year. Beijing has also vowed to step up fiscal and monetary policy support in 2024, though it has held out on giving cash handouts as other governments have done.

Even modest economic growth in China could mean a windfall for some brands this year and, encouragingly, the very top-tier Chinese client was relatively unaffected last year, a trend which Garland expects to continue in 2024. What concerns some luxury players is that the aspirational segment has yet to return.

“Despite strong Covid-driven savings, these more aspirational consumers have remained cautious on luxury spending in 2023, with concerns around the property market (which represents around 40 percent of household wealth) and uncertain economic conditions weighing on willingness to spend,” said Garland.

In the second half of last year, Chinese luxury spending outside the country was still less than half of its pre-pandemic levels, stifled by visa restrictions and limited flight capacity. LVMH reported that Chinese spending outside of China was at about 30 percent for its fashion division. That figure was even lower at Kering and Richemont.

For brands waiting for a stronger travel retail rebound than last year, 2024 is still looking somewhat uncertain. All eyes are now on the period leading up to this year’s Chinese New Year on Feb. 10.

According to an official from China’s Ministry of Transport, the country’s 40-day Chunyun travel rush (the period leading up to lunar new year festivities including the weeklong Spring Festival period ending Feb. 17) is expected to see about 2.09 billion passenger trips made this year, up 99.5 percent from 2022 levels. Chunyun is mostly domestic in nature but it also serves as a barometer for international travel in the post-pandemic era of pent-up demand.

People tend to buy less when they shop for luxury goods locally, Jean-Jacques Guiony, chief financial officer for LVMH, explained on an earnings call last October. Not only do taxes make luxury goods much more expensive in China, there is also the positive emotional impact of going on a holiday that often pushes people into shopping spree behaviour.

“Average [receipts] will tend to be lower [domestically] than if you go once in your lifetime in a foreign country where you want to buy something,” said Guiony.

Pre-pandemic, 60 percent of Chinese luxury purchases were made overseas and the remainder was domestic. After several years of closed borders in which brands invested in improving their store networks in China and strengthening country teams, The State of Fashion report forecasts a permanent repatriation of luxury spend. Domestic shopping is now expected to account for 60 to 70 percent of the spend.

Domestic travel was strong throughout last year and is expected to continue in 2024. The State of Fashion report forecasts it will reach 110 percent to 120 percent of pre-pandemic levels this coming year with Hainan, China’s duty free island hub, playing a big part in that.

“It has basically found its position,” said Daniel Zipser, Shenzhen-based senior partner at McKinsey & Company, BoF’s partner for the report. “There was a question, right? What happens when the borders are open again — will Chinese still go to Hainan or will they all just drop back to Hong Kong? We saw more people travelling to Hainan during the May holiday than people going to Hong Kong which was interesting and obviously very different from the pre-Covid days.”

For those travelling outside mainland China, Zipser said there is a bottleneck issue of long visa processing wait times and limited flight routes rather than a lack of demand.

“[Chinese] consumers actually are still very excited to travel overseas, including long haul flights,” he said. “So it’s not that the consumer is no longer interested… Money is basically waiting in bank accounts.”

Last year, the Hong Kong and Macau markets saw huge growth at many of the large fashion and beauty groups. Japan surged with Chinese tourists benefitting from a weak yen, as did South Korea. Outside of the “four-hour flight circle” around China, tourism is also picking up in Australia and New Zealand, the United Arab Emirates and Turkey, data from travel-booking platform Fliggy showed.

A gradual easing of visa restrictions is expected to boost travel to destinations further afield, particularly Europe. The US is unlikely to see a similar effect because of a strong currency and the badly strained US-China relationship. It is also less of a priority since it is not as price advantageous to buy luxury there.

Luxury jewellery and watches are expected to gain 4 percentage points of share of discretionary spending between 2023 and 2027, having overtaken handbags as the top-spending category in 2023, according to The State of Fashion report. It is being boosted by the belief that hard luxury goods are more likely to retain their value in an uncertain economic environment than other categories.

It’s no coincidence then that Tiffany & Co. launched its first online flagship for China on Tmall in December. Franklin Chu, managing director at Azoya International, a cross-border e-commerce consultancy, said he anticipates that lower priced jewellery will also do well in the year ahead.

However, not everyone is quite so bullish about the sector. In a recent interview with the Financial Times, the managing director of China’s largest retailer Chow Tai Fook, Kent Wong Siu-Kee, predicted that “in the short term, people will continue to be more cautious no matter [whether their purchase motivations are for] consumption or investment.”

Characterising this year’s outlook as somewhat subdued for that segment of the jewellery market, Wong said he only expects consumer confidence to fully return in a year or two.