The stock of luxury consumer giant LVMH, owner of Louis Vuitton, Christian Dior and Dom Perignon, crashed as much as 8.4% in Paris – its biggest drop since January 2009 – and dragged down its luxury goods peers such as Ralph Lauren, Tapestry and Michael Kors lower, after the company warned of slowing demand for luxury goods in China and confirmed social-media speculation that Chinese customs authorities are cracking down on high-end goods purchased by returning travelers.

“The Chinese authorities have some laws that are being enforced with some more strength at times, which is what we’re seeing now,” LVMH CFO Jean-Jacques Guiony said on a call with analysts Wednesday, quoted by Bloomberg.

According to Bloomberg, social media reports last week that China is stepping up checks alarmed investors in companies ranging from LVMH to Japanese cosmetics giant Shiseido. Since then, the fashion companies’ stocks have suffered sharp declines on concerns about access to the Chinese market.

The selloff accelerated on Wednesday even after LVMH reported strong results, with sales growing 10%, in line with analyst forecasts and previous periods. Growth in the Louis Vuitton brand’s sales to Chinese customers slowed slightly, to a percentage in the middle teens, in the third quarter, Guiony said.

The CFO said that the stepped-up customs enforcement may be aimed at curbing China’s booming business in gray-market imports, where enterprising Chinese residents purchase Louis Vuitton bags and other luxury items on trips overseas for cheaper than they can be purchased domestically; then sell them at a profit when they return home, undercutting fashion companies’ own stores in China.

This parallel market, known as daigou, “is not something that we welcome or that we try to promote,” Guiony said, adding that the company limits the number of items that customers can buy at stores in Paris and other locations. “The Chinese moving in the same direction is good for us.”

Despite the risk of unauthorized arbitrage in LVMH’s goods, the company said it has no plans to equalize prices in China and abroad he said, adding that that gap narrowed over the summer because of a reduction in import duties.

The pain quickly spread to other luxury names after Morgan Stanley downgraded the luxury goods sector to “underweight” on Wednesday, adding to pressure on industry stocks. 

The luxury sector “looks stretched on a number of our indicators even after the recent correction,” the bank’s analysts wrote adding that “a material slowdown in China presents the biggest risk to the sector,” highlighting “stretched” valuations in the luxury industry. The bank expects Chinese consumption trends to slow further in the second half of 2018.

LVMH – also home to couture label Givenchy and the recently revamped Celine brand, which it wants to big up under a new designer – has been among the biggest beneficiaries of the benign industry backdrop until now.

According to Pierre Willot, fund manager at Paris-based Montaigne Capital, “LVMH and Kering have had fantastic numbers in the past years – even if today’s numbers are still good, the market was hoping that the past outstanding growth trend would extend a few years longer.”

Alas, without Chinese consumers, the number one clientele for luxury goods manufacturers, that trends now appears to be over.

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