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Mainland shoppers, who account for a third of all sales for Gucci and Prada, queue up for luxury goods in Tsim Sha Tsui. Photo: David Wong

Luxury brands emerge as truly liberated Chinese currency

Shadow market of legitimate money laundering represents final step in liberalisation of the yuan

Welcome to our Twilight Zone of money that bends the laws of fiat currency. 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 law of natural selection also rules in the shadow banking jungle. And it can be seen working everyday in our city.

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.

When researchers Gary Gorton and Andrew Metrick stated that "liquidity requires symmetric information, which is easiest to achieve when everyone is ignorant", they were describing a global shadow banking system and cartel of big banks that created classes of excessively complicated financial instruments in order to perpetuate their power by keeping participants ignorant and dependent.

Mainland Chinese are the biggest single group of tax free shoppers in the world

Ironically, while analysts worry about the shadow banking underground in China, the rest of the world's non-transparent, over-the-counter markets nearly melted down the entire global economy. Today, this principle has been adapted and simplified to create a remarkable market for branded, luxury goods.

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.

Items that attain the status of a store of economic value are usually considered to be gold and real estate, but rarely luxury consumer items. That designer purses are considered tradeable confounds conventional thinking in other societies. But the same characteristics for fiat currency exist for a sought-after purse.

Hong Kong is a unique subculture that breeds unique market conditions for selling and re-selling luxury goods. A friend recently returned from Milan with a new Prada leather purse that was not yet available in Hong Kong. Strangers approached her on the street to ask her where she bought the new Prada.

People create their own understandable shadow banking market to replace the one that is incomprehensible. 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.

For a brief moment, bitcoin seemed to be a liberating force for anyone wanting to avoid government control. But it will struggle to find its version of the "killer app" that launched the internet into mainstream popularity.

If local shops and restaurants reject all HK$1,000 bills because certain ones may be counterfeit, then a non-government policed currency like bitcoin has little chance of real world acceptance. Bitcoin may end up consigned to digital curiosity and used by stalker, techie types who live in their parent's basement and play World of Starcraft.

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.

This article appeared in the South China Morning Post print edition as: Luxury brands emerge as truly free Chinese currency
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