George Chen

By George Chen
The opinions expressed are the author’s own.

It could be the perfect story to show how China Inc and its American partner can work together for a win-win result, but Chinese consumers are having second thoughts on this.

Earlier this year, upscale U.S. handbag and accessory maker Coach said it planned to list in Hong Kong to reflect the growing importance of China’s luxury market. Coach didn’t give a timeframe for the IPO plan, but one thing is fairly certain – before Coach launches its IPO, its local partner in the small city of Dongguan, near Hong Kong, will aim to rise $200 million first.

The company, Sitoy (Dongguan) Leather Products has hired Bank of America-Merrill Lynch for a Hong Kong listing by the end of November. In IPO marketing materials distributed to potential investors, Sitoy described itself as the largest handbag OEM (original equipment manufacturer) in China, although it didn’t name any of its clients.

However, Chinese netizens quickly found out from the company’s website (www.sitoy.hk) that one of Sitoy’s OEM clients is Coach, a  New York-based brand popular among China’s fast-growing middle-class. In China, Coach prices are far lower than those for top-tier brands such as Louis Vuitton and Gucci, although it is still considered a luxury brand among consumers in the world’s No.2 economy.

“Why not buy expensive Caoch bags directly from the Dongguan factory? I believe the cost must be very cheap,” said one Sina Weibo user in response to the news. Foreign brands — not only luxury fashion brands but also consumer electronic makers — have many OEM partners in China, although they are often reluctant to identify them to avoid such unsatisfaction from local customers.

In a company newsletter dated May 31, published on Sitoy’s website, the top headline is about senior executives of Coach visiting the factory and expressing satisfaction with Sitoy’s products for Coach. It’s now seems likely that at least some of Coach’s handbags are designed in New York but manufactured in Dongguan.

Coach was already in trouble after Chinese media pointed out that Coach handbags are much more expensive in China than they are in the United States, sometimes with a difference of hundreds of U.S. dollars. When the news about the OEM factory in Dongguan started circulating on China’s Twitter-like micro-blogging service Sina Weibo, some consumers felt they had been cheated after spending thousands of yuan on a bag that was probably made in Dongguan, a city whose reputation is usually linked with cheap labor costs.

On Sitoy’s website, the company expresses pride in being an example of the small city’s success as the world’s factory for shoes, garments and so on. Sitoy is in a position to list in Hong Kong, largely thanks to cheap labor costs and strong OEM demand from global clients such as Coach. But the case of Sitoy and Coach that is causing such frustration among Chinese consumers also raises the question of how luxury brands can keep selling at high prices while reducing costs.

Other fashion and leather brands including Salvatore Ferragamo and Burberry have said they do not plan to manufacture products in China, although Burberry has chosen other countries such as Turkey to make some low-end products such as T-shirts.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A Coach store in Hong Kong’s Central financial and business district, seen on Dec. 6, 2008. REUTERS/George Chen

By George Chen
The opinions expressed are the author’s own.

How time flies. It’s already the end of August and speculations naturally arise about what China’s inflation reading will be for this month.

The most optimistic view these days is that the August Consumer Price Index (CPI) could decline to below 6 percent. The most pessimistic view I’ve heard is that growth has slowed down in August, but probably only to 6.2 percent or 6.3 percent.

But, why should we care about the August CPI so much? One month cannot tell the whole story.

The reason we care so much is because if the August CPI growth slows down (we will see the official release of August economic data in the coming weeks), it’s good news for the central bank as well as for the ordinary people in China who have been fighting with fast inflation for more than three years already. But, it’s not good enough.

Yesterday, amid market talks about August CPI, I heard something interesting from Mengniu, China’s top dairy product maker: “We are confident we can at least maintain (first-half) margin levels in the second half,” Mengniu Chief Financial Officer Wu Jingshui told reporters after the company’s first-half earnings release. He added the company might raise product prices and adjust its product mix to offset an estimated 3 to 5 percent rise in raw milk costs in 2011.

I shared the news on my Twitter-like Sina Weibo micro-blogging service. What was the response from my audience? Frustrated would be the accurate adjective to describe it. Mengniu is the industry leader and if Mengniu leads the next and latest round of product price hikes, you can imagine how rivals will react. Or might they have already coordinated a move on the prices?

Mengniu is not alone as price increases are not just happening in the dairy product business.

Chinese liquor maker Wuliangye also announced this week it will raise prices for its alcohol by 20-30 percent starting September 10 and industry analysts expect Wuliangye’s local rivals will follow the path to maintain their profit margins, too.

So will CPI rebound (if it does decline in August, thanks to the recent fall of pork prices as some economists said) by the end of 2011?

More investors are becoming increasingly convinced these days that in a choice between GDP or CPI, Beijing should fight to maintain GDP not CPI. That is to say Beijing may tolerate further inflation, although at a slower pace month on month, but it can’t afford to see economic growth fall sharply to 7 or 8 percent, as estimated by some economists.

As you can see from the decisions made by Mengniu and Wuliangye, Chinese enterprises certainly don’t want to bear increasing costs that will hurt their profit margins. So, at the end of the day, the victims of China’s rising CPI are the Chinese consumers.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: Reuters file picture

By George Chen
The opinions expressed are the author’s own.

It’s been a month since my last column on Reuters.com as I have been on the road for a while.

When I travel in New York and London, my identity is more like that of a consumer with a dash of journalistic observation. People usually say Hong Kong is a shopping paradise but in my view, Hong Kong is no longer my favorite city for shopping. For U.S. fashion brands such as Cole Haan or Banana Republic, prices are much cheaper in New York. It’s the same for London if you’re a big fan of Burberry or Paul Smith.

The American people I know complain far less about the financial crisis than two or three years ago. Instead, some of them say they actually enjoy some of the benefits. Rents are cheaper. Food is cheaper. Transport companies are unable to raise ticket prices.

Prices for some nice homes in the historic Embassy Row, Washington D.C., look attractive to me. How much can you buy if you have $1 million? You can probably buy a nice house in downtown Washington or a tiny flat in Asia’s financial centre Hong Kong. $1 million is no longer a dream for many Chinese people thanks to the yuan’s appreciation. Let’s face it — America is cheaper and the Chinese are getting richer.

But the Chinese have their own problems; they don’t feel that rich at home.

The inflation reading for June hit a three-year high of 6.4 percent year on year, and Goldman Sachs said we may see further highs in July or even August. During his recent trip to Britain, Chinese Premier Wen Jiabao, often known as “Grandpa Wen” in China for his kind and down-to-the-earth image, claimed the inflation problem had been solved. He may need to think twice after seeing the angry public reaction in China on the rapid rise in consumer prices, especially food.

You may also want to hear what China’s central banker governor Zhou Xiaochuan said about inflation: he asked the media and public not to “overreact” to the June figure and apparently tried to prove he was doing a good job.

The central bank had many things to deal with, not only inflation, for example international payments, he said at a recent meeting. Mr. Zhou, I respect you as an intelligent and influential central banker, however, to ordinary Chinese such as my parents in Shanghai, your comments on inflation simply make them feel almost hopeless about the outlook for their purchasing power.

Perhaps the Chinese Communist Party, which is celebrating its 90th anniversary, wants to send this message — it’s not that bad to be Chinese. Go abroad and buy whatever you want and you will be proud of holding yuan and being Chinese.

Perhaps I’m too simple and naïve?

George Chen is a Reuters editor and columnist based in Hong Kong.

File photo: Shoppers walk up Fifth Avenue in front of the Cartier jewellery building in New York, December 7, 2008. REUTERS/Chip East

By George Chen
The opinions expressed are the author’s own.

The other day one of my colleagues in Shanghai was happy to see her favorite fashion brand, Gap, finally arrived in China. That same day, November 11, China announced that inflation rose to a more than two-year high of 4.4 percent. It is no wonder then that, these days, Chinese people are complaining that almost everything is becoming more and more expensive including, of course, fashion.

Just a couple of years ago, my friends in Shanghai told me that when they go shopping, they might spend several hundred yuan on average buying quite a few items including jeans, a coat and some cosmetics. Now? 1,000 yuan, (about $150) is almost nothing — it’s easy to spend more than you ever expected, and faster.

A decent dinner in Shanghai’s popular nightlife area, Xintiandi, two movie tickets (nearly 100 yuan per person), T-shirts, perhaps some cosmetics, and taxi fares will eat up about 1,000 yuan.

Despite fast growing inflation, which some economists say is likely to rise to more than 5 percent early next year, Chinese people are still spending more than ever and the global financial crisis hasn’t dampened the spending spirit in China, whose economy is probably the least affected during the crisis. In fact, Beijing is encouraging its residents to do so in order to boost domestic consumption and reduce the country’s reliance on exports.

Deutsche Bank Chief Greater China economist Ma Jun sees a lot of opportunities as a result of inflation: “We see inflation as the most important investment theme in coming months,” he said in a November 11 research note to clients.

The government may step into the market to control price increases in some areas, such as energy and utilities, but for many other consumer products like fashions, appliances and food, there’s not much Beijing can do. Can Beijing force Pizza Hut restaurants not to raise prices if the cost of food material and human resources keep rising? Of course not.

Remember, Beijing is trying to brand itself as a market-oriented economy and not as a planned economy any more.

To some extent, Hong Kong, the former British colony that returned to Beijing’s hand in 1997, actually can benefit from China’s inflation story. At least Hong Kong’s landlords should be happy. After the official release of China’s latest macroeconomic data lastThursday, the Hong Kong media reported that rent for a small store in the city’s Tsim Sha Tsui shopping area was likely to double in 2011, from HK$850,000 ($109,166) to nearly HK$2 million ($258,038) per month as businessmen expect mainland tourists to further boost Hong Kong’s economic growth.

And, after the first store launch in Shanghai, the Gap said it plans to open three more stores in China. For Western companies that don’t want to miss the new wave of Chinese consumer spending, now seems to be a good time for them to plan around the idea of China’s inflation.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A customer travels down an escalator in the newly opened H&M shop in Shanghai April 12, 2007. REUTERS/Nir Elias