Luxury brands emerge as the truly liberated Chinese currency, representing the final step in liberalization of the yuan: a shadow market of legitimate money laundering.
Only in Hong Kong and the mainland can luxury fashion and accessory brands prove themselves to be a reliable store of monetary and economic value. The yuan is only a semi-convertible currency: you can convert the yuan to foreign currencies only under certain conditions and restrictions. Companies engaged in trade and investment have benefited from increasing liberalisation over the last 10 years. The yuan is getting closer to becoming a widely accepted and freely traded international currency, but individuals still cannot freely exchange and move the currency.
Mainlanders visit Hong Kong to buy an expensive purse for let’s say around HK$30,000 with their yuan credit or debit cards. Then, they sell the purse for a discount (around 15 per cent to 25 per cent) and collect freely convertible Hong Kong dollars at a specialist reseller like Milan Station. A similar cycle occurs for luxury watches bought in Hong Kong and traded in Macau’s pawn shops. This explains why the displays of Hong Kong watch retailers are regularly empty while Macau pawn shops are filled with new time pieces.
Hong Kong is a unique subculture that breeds unique market conditions for selling and re-selling luxury goods. Consistency, widespread popularity, status, demand and authenticity are as much the foundation of any currency as they are for a purse emulating a form of currency. In addition to homemade money laundering, another group of mainlanders returns to China to sell their luxury wares online in massive B2C sites like Taobao where demand seems insatiable.
According to CLSA, mainland Chinese account for 33 per cent of sales for Gucci and Prada. Including Hong Kong, CLSA believes that shoppers in China account for 38 per cent of the brands’ global sales.
Mainland Chinese are the biggest single group of tax free shoppers in the world, accounting for 19 per cent of total sales. Like a prestigious reserve currency, prices reflect prestige. CLSA estimates that Chanel, for example, passed on a 20 per cent price increase in 2011 with no discernable impact on sales.
When faced with artificial currency barriers, human greed, creativity and a free market neighbour, the free market usually finds a winning, market-based solution. A shadow market of legitimate, consumer money laundering has taken hold that truly represents the final step in the liberalisation of the yuan.
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Article: South China Monring Post / Image: David Wong