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A Million New Millionaires. What Are They Buying?

What does it look like when Chinese people enjoy their newfound wealth? Not so long ago, buying a color TV or taking the entire family out for dinner at McDonalds would have been a splurge. For poorer families that still qualifies. But not for China's new rich.

China now has almost one million millionaires. The Hurun Wealth Report's new rich list says China has created 960,000 millionaires as of this year. That's an increase of 135,000 from the 825,000 millionaires Hurun reported just two years ago – an astonishing rise in personal wealth.

Keep in mind that these are "dollar millionaires", extravagantly wealthy by Chinese standards. And most of them are very new to their wealth and they are extremely eager to show off.

The average age of the Chinese millionaire is only 39 years old – 15 years younger than those in the U.S. and Europe. Just as amazing, 30 percent of Chinese millionaires are women.

All of this new wealth is creating a major boom in China's luxury goods market. Not long ago we reported that China was on course to overtake Japan as the world's top luxury goods market by 2015, accounting for 20 percent of worldwide sales.

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Now, with China's accelerating wealth and Japan's slump following the earthquake disaster, the Chinese will likely hit the number one spot even sooner.

A Picture of New Money

An armada of private jets descended recently on the gorgeous southern coast of Hainan Island. In the tropical resort of Sanya, throngs of China's new rich were enticed with displays of vintage wines, elite villas, one-of-a-kind jewelry, and glittering watches set with colored diamonds.

The four-day event was designed to demonstrate world-class standards of wealth to China's luxury-hungry consumers. Representatives of 195 global luxury companies shipped in hundreds of millions of dollars worth of bling to show off to the world's new moneyed elite.

Among the high-end brands, Switzerland's Chopard shipped in 200 million yuan worth of watches and jewelry from Europe for the event. A representative was quoted in the Chinese press as saying, "Sales far exceeded our expectations; we received hundreds of customers."

Investors in luxury brand companies should keep in mind that China's luxury boom will look much different from the development of the sector in Europe or the United States. The Chinese middle-class is rising very quickly and developing a hunger for glitz and glamorous goods.

McKinsey Insights says, surprisingly, the new growth area is among Chinese who can barely afford western-style luxury. In a recent report, McKinsey wrote:

"Wealthy consumers (with incomes above 300,000 renminbi, or about $46,000) will continue to account for a majority of luxury consumption. But our research shows that the 13 million households in China's upper middle class (incomes between 100,000 and 200,000 renminbi) offer the biggest new growth opportunity."

Keep in mind that 100,000 yuan or renminbi amounts to only $15,400 at today's exchange rates. This bracket is not a potential luxury buyer in any other market. McKinsey says:

"They already account for about 12 percent of the market, and their numbers are growing rapidly: we expect to see 76 million households in this income range by 2015, accounting for 22 percent of luxury-goods purchases."

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What about fake goods? China is famous for counterfeiting brand name goods, but Chinese consumers are becoming more discerning.

McKinsey says: "The percentage of those who said they would buy fake jewelry dropped to 12 percent, from 31 percent in 2008. Some luxury buyers told us they felt sure that their friends would spot a counterfeit."

Spectacular Growth

Beijing is scrambling to close China's wealth gap. In an effort to ease social strains, taxes have been adjusted to remove the burden from those with lower incomes. A new initiative would increase the number of tax-exempt Chinese. It would raise the minimum income required to pay income tax to $450 a month from $315.

Even more dramatic, other policies include a promise to raise average wages by 15 per cent a year. That should double average wages by the end of 2015. The government also intends to build 35 million units of low-income housing over the next five years.

As Beijing stokes the fires of increasing domestic wealth and stimulates consumer spending, the outlook for luxury goods sales in China is simply breathtaking. CLSA Asia-Pacific Markets, majority owned by France's Credit Agricole is looking ten years into the future.

CLSA predicts that overall consumption in China will rise by 11 percent annually over the next five years. Sales of luxury goods in China will grow more than twice as quickly, by 25 percent a year.

China will account for as much as 44 percent of global luxury sales by 2020 according to CLSA. (Remember that China will become number one in 2015 just by hitting the 20 percent mark.)

Forty-four percent is more than a sign of Chinese super-dominance in the sector. It is a signal that a vast new market is emerging right now.

For investors with a long term outlook, diversifying your portfolio into major luxury brand names is a move well worth considering.

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Global Profits Alert (GPA) is published by Trippon Financial Research, Inc. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Todd Shriber, Kelley Damiani and J. Daryl Thompson.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.