Apologies if already reviewed, certainly worth reading if it hasn't (bolding is mine) --
February 29, 2004
Three Chinese bubbles
Three interesting Economist articles about luxuries in China.
I live in a great apartment in Shanghai - well over 1,000 square feet partially furnished in a new building with two balconies and one block from the subway. Everyone tells me I shoud buy it. I'm not going to touch it - I firmly believe that Chinese residential property is overvalued. The Economist describes "Chateau Regalia", a gated luxury development ourside Beijing with houses ranging from US$720,000 to US$1.5m. Places like this are sprouting up like mushrooms around all the major Chinese cities. Many of them are stading empty.
The Chinese government is trying to put on the brakes, restricting loans and trying to control land use right sales. It's a losing battle. For example, real estate developers are not allowed to borrow money to buy property but once they buy the property they can take out a construction loan. So instead of borrowing to buy land the real estate company will buy a commodity with a 180 day letter of credit, sell the commodity right back to the seller for cash (without ever touching it), buy the property with the cash, get their permits, and then use a construction loan to pay back the bank they bought the letter of credit from. It's like a balloon - you squeeze it in one place and it bulges out in another.
Another Chinese bubble is ski slopes. The Beijing area is cold but dry so you cannot count on natural snow but snow making works. You need water, but if you have the right connections it is easy to convince local governments that a ski slope is more important than villagers or farmers. The snow quality is poor but if you have never skiied anywhere else it is still an incredible experience. Unfortunately for the slope operators increased competitors have lead to price wars.
I think ski slope operators will do better than property developers - the Beijing region has a limited water supply and rising incomes will increase demand for leisure services.
China is well known for its fakes but there is strong demand among "chuppies" and the nouveau rich for real brand names. Omega found that 50% of its watch sales in Hong Kong were to mainland visitors so Omega decided to open stores in China. Rather than starting in the rich cities of Shanghai, Beijing, and Guangzhou they started in Shenyang, in China's north-eastern rust belt. There was a method to Omega's madness though. When investigators arrested Mu Suixin, Shenyang's mayor, for corruption, they reportedly found over 150 genuine Rolexes in his house. The north-east has some very rich people... most of them are in the government.
Omega is now branching out to other cities like Beijing. Kevin Rollenhagen, Omega's head of operations for Hong Kong and China, says that Chinese people will not buy fake products "if they can afford the real thing." I disagree - as Chinese consumers become more sophisticated they will realize that brand premiums are rarely justified by quality. The super rich will buy real products. Others will be more like me. I could afford a real Omega but I'm wearing a $20 "Omega". Even many of the rich may decide that conspicuous consumption is a bad idea. Mu Suixin's downfall came when Hong Kong reporters noticed that he was wearing a Rolex that cost far more than his salary.
Sorry Kevin.
Posted by mfriedma at February 29, 2004 06:03 PM | TrackBack | Categories: China
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