Chinese border guards searching travellers' suitcases for undeclared Louis Vuitton bags, Gucci loafers and Tiffany necklaces are giving luxury-goods makers their biggest scare in years.
Shares of some of the biggest brands, from Prada to Shiseido, tumbled across the globe on signs that Chinese officials are cracking down on travellers returning from places such as Paris, London and Tokyo loaded with high-end merchandise.
The stricter scrutiny is adding to fears of a slowdown in spending by China's consumers, who account for two-thirds of the luxury market's growth.
Luxury investors were already skittish, as the effects of the United States-China trade war threaten a three-year spending boom.
"Spending on luxury goods by travelling Chinese shoppers in overseas markets could slide on concerns of increased scrutiny by Customs authorities," said Bloomberg Intelligence analyst Catherine Lim yesterday. "This may hurt sales in the country of origin for branded goods in popular categories such as cosmetics and bags."
Shares of Louis Vuitton owner LVMH fell 7.1 per cent, the most since 2009, on Wednesday, and rivals, including Gucci owner Kering, Tiffany & Co, Michael Kors Holdings and Coach owner Tapestry followed suit.
The sell-off spread to Asia yesterday. Prada slumped as much as 11 per cent in Hong Kong, the biggest drop in more than a year. Japanese cosmetics company Shiseido fell more than 8 per cent for its largest decline since February. In South Korea, LG Household & Health Care and Amorepacific Corp fell more than 7 per cent.
Mr Terry Hong, an analyst at Guotai Junan Securities, played down the significance of the border crackdown, noting that such actions have been happening over the past two years. The broader global market sell-off and concerns over China's slowing economy are also impacting the sector. The tariff spat with the US is dragging on China's growth, with factory activity in retreat and the yuan sliding.
"The luxury brand shares are usually hit the most amid the depressed sentiment over the slowdown in Chinese consumption," he said. "Investors are likely overreacting on negative news."
LVMH on Wednesday confirmed speculation - which surfaced on social media last week - that Chinese officials are cracking down on travellers returning with luxury goods. Some of those items are sold at a profit when shoppers return home, undercutting the luxury companies' own, higher-priced stores in Beijing or Shanghai.
China's Customs administration did not immediately respond to a faxed request for comment.
"The brands that this hits the most are the most recognisable," said Mr Simeon Siegel, an analyst at Instinet. "It's the brands that are worth buying because of the logo."