CHINA'S huge population has a funny way of warping the perspective of both retailers and investors when it comes to tapping the huge consumer market, estimated to be worth about US$200 billion a year. There is no doubt China offers tantalising opportunities as the growth in disposable income has been accompanied by heavy demand for products previously unavailable. The sobering reality, however, is that China has proven to be a Pandora's Box for many retailers rather than a profitable paradise. Already faced with imposing start-up costs and bureaucratic nightmares, retailers expanding in or entering the mainland market now have to deal with an economy plagued by disturbing signs. The most troubling are the sharp devaluation of the yuan, which is now trading at an unofficial rate of about 8.24 to the US dollar, and an alarming rise in inflation. Beijing has vowed to cool down its overheated economy by tightening credit, highlighted by an increase in lending interest rates by 0.82 percentage point to 9.82 per cent last month. As a result, investors are realising it could take foreign retailers many years to reap significant profits. Many punters have taken another look at their portfolios and questioned whether their initial euphoria was displaced. Not surprisingly, retail stocks with China-exposure have tumbled sharply since mid-March, while the Hang Seng index has climbed 26.4 per cent. Fairwood Holdings has fallen 25.8 per cent to $3.75 from $5.10; Giordano, which owns 20 per cent of Tiger Enterprises, fell 9.7 per cent to $6 from $6.65; Goldlion lost 15.2 per cent to $9.15 from $10.80; and Cafe de Coral sank 24.4 per cent to $5.10 from $6.75. ''All these went up because they did have a China angle but it was a bit hyped and exaggerated and the price-earnings got stretched,'' says Salomon Brothers managing director Willie Phillips. ''People realised things were really not bad but they weren't that good.'' The weak performance of the stocks has been supported by strong sell recommendations from a number of brokerage houses. SHK Securities, for example, has recommended its clients to dump all four counters since March because they were too expensive. ''We've talked to a lot of retailers and they're not all optimistic,'' says SHK Securities analyst Anna Tong. ''A lot of them are quite cautious about entering the China market.'' Nevertheless, many retailers are moving ahead with expansion plans and hoping China's economic woes are short-term. A strategy adopted by many retailers to offset the devalued yuan is to simply raise prices. Analysts say this is, at best, a short-term strategy because consumer demand for Western-style products could easily be deflated if prices are too high. Goldlion, which has enjoyed great success in China because of chairman Tsang Hin-chi's close relations with senior leaders and the widespread use of local retailers and wholesalers, has a number of strategies to deal with China's economic woes. It generates 60 to 70 per cent of its sales from China and is confident it can raise prices without hurting sales. ''Our customers can easily absorb price increases,'' says financial controller Louis Lau. ''They're just crazy about our brand name.'' A recent report by Schroder Securities says Goldlion also faces the problem of growing competition in two to three years because China's anticipated entry into the General Agreement on Tariffs and Trade will lower import duties. Schroder, which estimates Goldlion's average prices in China have jumped 50 per cent in the past year, says a number of internationally-acclaimed brand names would move into China and test the loyalty of Goldlion's customers. Tiger Enterprises president and chief executive Paul Kua says the yuan's devaluation is troublesome because the company is Hongkong-based with substantial Hongkong dollar expenses. ''I'm very concerned,'' he says. ''What I can tell myself is that my competitors who are going in and do not have the same volume base will face the same problem if not worse.'' Mr Kua says rising production costs and inflation in China leave Tiger with little choice other than to raise prices - a difficult strategy to swallow for a company that prides its self on affordable apparel. Analysts say investors should be wary of retailers expecting immediate profits from China. Retailers now entering the mainland or expanding their networks are laying a foundation for the future, which, in the short-term, is an expensive exercise. Investors - like the retailers whose shares they purchase - should be aware that while the potential to make profits in China is enormous, it is still a long-term proposition and one fraught with risks.