Hypothesis to be tested and econometric model

Hypothesisto be tested and econometric model

Due to the global financialcrisis occurred in 2008, the global economy was in a terriblesituation. The luxury market has a bad impact in this crisis as well.However, while the world’s luxury market was suffering in the downtrend environment, the Chinese luxury market was gaining a goodshape. The revenue of Chinese luxury market has kept growing in thepost crisis era. Because of these, China’s growing luxury markethas become a major point of contention among luxury productmanufacturers across the world. Each of these manufacturers isfighting to get a stake in the Chinese market. Since the Chinesemarket has this huge power in the global luxury market, everything inthe Chinese economy has become the focus of the world, such as theanti corruption campaign of Chinese government, it will have a bigimpact of the world’s luxury market, which I will explain later inthis study.

In this study there were twomain questions to be answered what is the relation between theChinese economy and the luxury market in China? And what kind offactors influences the Chinese luxury market? These questions werelinked to the independent variables of this study — CurrencyExchange Rate, Per Capita Disposable Income of Urban HouseholdsVolume, Consumer Price Index (CPI) and Per Capita Gross DomesticProduct (GDP) Volume, also to the dependent variable, which is theSales of Luxury Goods Volume. The comparison of these dependentvariables and independent variables will reflect to the hypothesis ofthe study and answer the two question mentioned above.


The hypothesis for this study isthe Chinese luxury market will have a positive relation with theChinese economy. As the economy growth, the consumption of Chineseluxury market will grow as well. In order to measure the China’seconomy trends, I chose the following independent variables, PerCapita Disposable Income of Urban Households Volume, Consumer PriceIndex (CPI), Per Capita Gross Domestic Product (GDP) Volume andChinese currency exchange rate, to reflect the Chinese economystatus. All of these data could reflect the economy of China, butthey still could represent some other situations. By doing theregression analysis for these variables, a lot of results could befound by how relevant each data to the dependent variable. In thefirst stage, I believe that the GDP and CPI will have the most impactto the sales of the luxury goods in China, and then the Per CapitaDisposable Income and Exchange Rate will have less impact to thesales. All these impact would be positive. Because the GDP and CPIare the most straightforward data to represent the economy, as theeconomy growth, people will spend more on luxury goods, which willimprove the market. A lot of articles believe that, the luxuryconsumption has a tied relation with the GDP, which is match myhypothesis. Other than present the national economy, the Per CapitaDisposable Income of Urban Households Volume could also represent theaverage situation of urban families.

Normally, urban population willbe the major customers for luxury goods. If they have more disposableincome, they will buy more luxury products. Then, the exchange ratewill impact the import and export field of a country. Since most ofthe luxury brands are from foreign countries, this will lead us tothe importation. In my point of view, as the CNY has become more andmore of value, the importing amount of foreign products will increaseand to improve the luxury market. According to the economic theory,these are very reasonable assumptions. In fact, I could not find anyresearches that prove the assumptions I listed above, and that is thereason I will do the multiple regression analysis for these data tosee if my hypothesis is correct.

In order to have the mostappropriate econometric model, I created three tests, which are shownin the following Stata regression analysis outputs Test 1-3.


Fromthe first regression output from Stata, the F value for theregression is higher than the FCritvalue and the P is 0. Also the output informed the adjusted R2is about 95%. These test value all prove that the independentvariables in this study are relevant with the dependent variable.This output could help build the first regression equation of thestudy:

Salesof Luxury Goods = -15252.62 + 0.0604924* PDC + 72.28491* CPI +0.0060546* GDP + 7.332064* Exchange Rate

In this regression analysis, Iwill focus on the relation between all independent variables and thedependent variable, whether they are statistically significant and,if so, the direction of the relationship. As the regression analysisresult shows, the Per Capita Disposable Income of Urban HouseholdsVolume (PDC) is not statistically significant at the 0.47 level(p=0.471). The coefficient is positive which would indicate thatlarger PDC is related to higher the Sales of Luxury Chinese Luxurymarket. Next, the effect of CPI (Beta=72.28, p=.000) is significantand its coefficient is positive indicating that the greater theChinese Consumer Price Index, the higher the sales volume. Also seethe GDP, which at the 0.88 level (p=0.884). It is not statisticallysignificant but has a positive relation with the sales due to thepositive beta value. Lastly, the exchange rate between CNY and USD(Beta=7.332064, p=.000) also related to the consumption of luxurygoods in Chinese market in a positive relation.


After the first test, I found outthat the GDP has a very small t value as 0.15 and a large P value as0.88. This means the GDP have the less relevant in this multipleregression analysis. Because of this, in the second test, I removeGDP from the data set and got a new output. From the new Adjusted R2value (Adj R2=0.9469),this analysis is better than the last one, which has an Adjusted R2as 0.9459. From this new output, we could see the CPI and ExchangeRate are still the most relevant factors to the dependent variable.The P value for PDC has decrease and its beta has increase by 0.008.So I tried to remove the PDC and do a new test again.


Theadjusted R2value for the new test that has removed PDC is 0.9458, which lowerthan the output in test 2. Although this regression analysis stillhas an effective adjusted R2value, but in this study, the test two results is more suitable. Baseon this finding, I could have a new equation for the hypothesis:

Salesof Luxury Goods = -15225.86 + 0.0685789PDC+ 72.06737CPI+ 7.326792ExchangeRate

Empirical findings,econometric issues, and policy implications

The results from the regressionanalysis have proved a part of my hypothesis. The CPI and theExchange Rate have a big impact of the luxury market and the PerCapita Disposable Income of Urban Households and GDP have arelatively low impact of the sales. This result depict that theluxury market has a positive relation to the Chinese economy,however, some other factors behind these data will also influence theluxury market significantly. As the regression analysis result forthe PDC, we could see the disposable income of every urban familywill not have a big impact on their luxury goods spending. From thisresult, it could reflect the consume behavior that the Chinese willnot spend a large part of their money on the luxury goods. Most ofthe Chinese families will save their money in order to spend them onthe luxury products (Lu,Chen &amp Zheng, 2013). Thesemeans a lot of Chinese do have money on their hand and it isimportant for luxury marketing people to attract these people tospending their money in order to raise the revenue.

CPI and GDP are both importantfactors to reflect a country’s economy trend. We could comparethese two data, CPI and GDP, together. From the T-test and P-testresult, the CPI has a great impact of the dependent variable, but theGDP has a significantly low influence to it. Normally, CPI stability,full employment and GDP growth is often the most importantsocio-economic objectives of a country. In most of the developedcountries, the CPI and GDP usually change by the same amount in thesame trend. Because of these, we expect to see the CPI and the GDPlargely impact the luxury market. However, the result is differentfrom the expectation. This is due to the special wealth structure ofChina. The GDP of China currently has become the second place in theworld. At the moment, the gap between poor and rich in China hasgrowth significantly.

The Chinese GINI coefficient haschanged from 0.28 to 0.48 from 1978 to 2007. This means most of thenation‘s wealth is owned by very few people. According to the WorldBank, 1% of Chinese families own 41.4% of the wealth of China (WorldBank, 2007). Underthis situation, the fast growing GDP of China could not accuratelyrepresent the situation for most of the Chinese families. This makesthe GDP have less influence to the dependent variable. Different thanthe GDP, the China`s CPI has a big impact for the consumption ofLuxury goods. CPI normally could reflect the inflation situation of acountry. China does not have a serious inflation situation butresidents could still feel an obvious price rising for the productsin the market. However, compare to the normal goods, the luxuryproducts have relatively less price increments. With the increasingsalaries of most population of China, the inflation on the normalgoods makes their gap with luxury good much smaller. The luxury goodsare not that “faraway” from themiddle class residents in China. These make the sales of luxury goodsin the Chinese market increase in the past 14 years.

The exchange rate also has a bigimpact to the Chinese luxury market’s revenue. The reason of theseis higher value of Chinese currency, lower cost for importing goodsfrom the foreign countries. As the cost of importing the luxury goodsfrom foreign countries lower, the price of these goods will alsobecome less expensive. Related to the reason mentioned for CPI, itwill cause the residents to buy more luxury goods. This also leads toa culture issue of China. Chinese people like to buy things that theythink are comparatively cheap. This means, in order to spend 10dollars for bottled water, they will prefer to spend 1000 dollars fora luxury brand handbag, even when they don’t need the bag at all.Just because 1000 dollars for a luxury brand handbag is cheap(Thomas, 2012).

In conclusion, from the resultsshown above it is possible to assert that Chinese luxury market isstill not saturated. There is still a large margin in the market.People do have their money in hand which means Chinese still haveextra buying powers. Connected to the impact of exchange rate, policymakers could encourage more local companies to importing luxury goodfrom the foreign market. Also, explore the second and third tiercities market is also very important. The people in the second andthird tier cities have a lot of wealth but lack of luxury stores inthese cities makes them hard to consume on the luxury goods. In orderto develop this market, open more stores or improve the onlineshopping service will be a really good way.China is experiencing very minimal problems if any in its luxurymarket however the country is scaling up its citizens into uppersocietal classes each day. It means that within a single day there isan individual who moves from lowly paid to middle class, for instanceat the present the country has registered approximately 2.7 millionrich people (Thomas, 2012). It is this group which is in constantneed of prestige and real luxury goods in the market. Shanghai hasalready established itself as a world class fashion center howeverdemand is already shifting to other emerging middle class in thesecond and third tier cities in the country. Finally, Chinese luxurymarket is a booming zone for any luxury goods manufactures in theworld as illustrated by the findings postulated above.


Lu,H., Chen, Y., &amp Zheng, Z. (2013). Researchon Chinese Fashion Luxury Goods Markets and Consumer Groups.AMR,796,488-491. doi:10.4028/www.scientific.net/amr.796.488

Thomas,O. (2012). Here`sWhy China Is The Future Of The Luxury-Goods Market.BusinessInsider.Retrieved 24 November 2014, fromhttp://www.businessinsider.com/china-future-luxury-goods-market-2012-7?op=1

WorldBank, (2007). World Bank Research Observer Cumulative Index,2005-2013. TheWorld Bank Research Observer,15(1),137-144. doi:10.1093/wbro/15.1.137