America has an addiction problem. The number of lethal drug overdoses has increased at an alarming rate, with a two-fold increase in opioid related mortalities since 2000. According to the Center for Disease Control and Prevention, there were over 47,000 fatal drug overdoses in 2014, 62 percent of which were caused by opioids, making drug overdose the leading cause of accidental death in the United States.

Drug addiction and overdose cases have been on the rise, and awareness has increased as well. Over the past few years, the addiction treatment industry, valued at $35 billion by the Substance Abuse and Mental Health Services Administration, has gained traction. Although the American addiction problem has caught the attention of policymakers and the general population alike, a subset of drugs has gone largely ignored — synthetic drugs.

Fentanyl is a highly potent synthetic opioid that is 50 times stronger than heroin, 100 times stronger than morphine and has grown in popularity in North America. According to a Wall Street Journal analysis, fentanyl has been linked to 9,600 cases of fatal overdoses since 2013. Music legend Prince was one of those cases this past April.

Prescription fentanyl is a legal painkiller for serious cases of cancer, but most fentanyl overdose cases are usually related to illegally obtained fentanyl, the majority of which can be sourced back to China. Many pharmaceutical or chemical companies in China send fentanyl directly to the United States, Mexican drug cartels or dealers in Canada. The Chinese companies also ship fentanyl precursors, chemicals that are essential to making fentanyl, to North American drug labs. Fentanyl usage is concerning not only because there has been a sharp rise, but also because fentanyl’s high potency and easy accessibility means that there is potential for increased abuse. In some forms, fentanyl can be fatal just from direct contact, and the Wall Street Journal reported a case in which an airport customs officer fell into a coma just from handling fentanyl.

Often times, people are not aware that they are overdosing on fentanyl until it is too late. Drug dealers mix fentanyl with other drugs, such as heroin or Xanax. Fentanyl pills have also been made to resemble less potent pain pills, such as oxytocin or hydrocodone, that are typically more expensive than fentanyl pills. This is dangerous because unsuspecting addicts think they are consuming normal pain pills but end up consuming a chemical that is much stronger, leading to overdose.

The business is ludicrously profitable, and there are loopholes to get through trade regulations. For example, by ordering unregulated chemical precursors and pill presses, Americans can start their own local fentanyl pill labs in their own houses. One pill press can produce thousands of pills per hour, and according to Wall Street Journal calculations, 25 grams of fentanyl costs $810 to make but could be worth $800,000 in pills— a profit of nearly 10,000 percent.

Additionally, Chinese pharmaceutical companies stay ahead of law enforcement by creating fentanyl analogues, variations of fentanyl that are often just slightly different in chemical composition. By shipping fentanyl analogues that have not yet been recognized by the United States government, Chinese companies and drug dealers skirt by the law to continue on with their business. It is difficult for law enforcement to keep up with fentanyl analogues that are constantly being created. For instance, when China made acetyl fentanyl illegal, to curtail drug abuse, other versions of fentanyl started appearing in North America instead, such as furanyl fentanyl, which is 5 times less potent that the original but is still the cause of many deaths.

In October 2014, China banned over 100 chemicals, including 19 fentanyl analogues, but progress remains slow. Trading is still easily accomplished, because many pharmaceutical companies simply “mislabel” their packages as random common goods. Even if a box of fentanyl or fentanyl precursors is discovered before reaching its destination, drug companies make it hard to track them by using multiple freight forwarding companies or fake addresses in China.

China is the second largest pharmaceutical market and has chemical resources, lenient drug regulation and low production costs. This irresistible fentanyl market has made China the main source for illegal fentanyl, and the main focus for United States policy makers who are aware of the fentanyl crisis.

Recently, in August, the United States and China held negotiations to curb the illegal trade of fentanyl. In a joint statement after a G-20 meeting, China agreed to exchange more information and increase regulation of drug exports, especially for drugs that are legal in China but not in the United States. In exchange, the United States Drug Enforcement Agency (DEA) will help train Chinese police to recognize financial irregularities and laundering that may be related to the Chinese synthetic drug business.

Negotiations show improvement, but talks and compromises take time to execute. China itself is preoccupied with heroin, meth and ketamine addictions rather than synthetic opioids. As a result, the country is more focused on regulating heroin than fentanyl.

Moreover, the Chinese pharmaceutical industry has only been growing and shows no signs of slowing down. According to the United States Department of Commerce and the International Trade Administration, Chinese pharmaceutical sales amounted to $108 billion in 2015 with an annual growth of nine percent. More importantly, United States imports from China added up to $2 billion with an annual growth of nearly 27 percent. These numbers indicate that strict trade regulations and decreasing Chinese drug exports are not trends that will be seen in the near future since there is such a large demand for Chinese chemicals. In the case of fentanyl, which is not strictly illegal in China, the synthetic drug operation benefits Chinese businesses, giving China little incentive to cut down on fentanyl trading.

Despite lack of incentive to regulate fentanyl trading, China is currently cooperating with the United States in negotiations. Therefore, it is important that the United States continues to make an effort to eliminate fentanyl usage, especially since fentanyl is increasingly contributing to and sustaining America’s drug user population. Eliminating fentanyl usage is key to fighting the war on drugs, which in turn decreases crime. According to the Bureau of Justice Statistics, 17 percent of state prisoners and 18 percent of federal inmates committed their crimes to get money for drugs. Many studies have also indicated that there is a correlation between being under the influence of drugs and committing a crime.

For the safety and health of Americans, United States policymakers need to not only commit China to strict fentanyl trade enforcement but to also pressure the United Nations to internationally regulate the drug as well. Currently, there are no international laws that have specified fentanyl as a problem, yet people from all countries risk exposure to fentanyl as long as illegal fentanyl is being produced and traded. United Nations recognition of fentanyl trade laws would both force China to comply with the standards of the international community and act as a symbol of unity behind fentanyl elimination. This would give China no choice but to act on promises made, preventing drug overdoses and saving lives.

Since the smartphone first came out on the market, people have been filling their screens with dozens of new apps. On many phones, you can find Uber, Facebook and perhaps a few apps from banks and popular stores. WeChat, a messaging app created by Chinese company Tencent, combines all of them into one and is taking advantage of the growing mobile e-commerce market to move beyond providing simple messaging services. Released in just 2011, WeChat has grown to have over 806 million users and makes its counterparts, Facebook’s Messenger and WhatsApp look primitive in comparison.

WeChat sets itself apart by combining and innovating features of many other social media and e-commerce apps. Besides simple messaging, WeChat also allows users to video chat and call their contacts. Users can also post photos and status updates in the “Moments” section much similar to Facebook’s Newsfeed. Their contacts can then tag, comment or like each others posts. WeChat has also brilliantly streamlined the process of connecting to new people. Users simply scan personalized QR codes to connect with new contacts. At large functions, such as a parties or networking events, users can quickly connect with each other by using the “shake” or “radar” features that connect individuals to others in their immediate vicinity.

WeChat’s foray into e-commerce is what truly set them apart. In 2013, WeChat launched WeChat Wallet, an internal app feature that at first allowed users to send money to each other, similar to PayPal’s Venmo. Many Chinese users especially took advantage of the new feature during the holiday season. According to the Wall Street Journal, in 2016 Chinese users sent 32 billion “bundles” of cash during New Years alone. About a year after the start of WeChat Wallet, Tencent partnered with Didi, a taxi hailing app. WeChat users were then able to call and pay for a taxi all within the app. In its first month, over 21 million cab rides were ordered via WeChat according to TechInAsia. This service largely helped Didi push Uber out of the Chinese market.

Tencent’s partnership with Didi was WeChat’s first major advance in e-commerce. Shortly after, WeChat launched in-store payments. Tencent took advantage of the WeChat Wallet platform and QR codes already in the app to make in-store payments more seamless. Users would first link their credit cards with WeChat Wallet then have their QR code scanned when making a purchase at a store. According to the Financial Times, WeChat handled 21 percent of Chinese mobile payments in 2015, just a year after starting the service.

WeChat also allowed businesses to make their own accounts, similar to Pages on Facebook. As a result, consumers can browse, research and make purchases all within the app. According to Tencent, over 300,000 retail stores connect with customers on WeChat. Like eBay and Amazon, individuals can start accounts to sell their own products. Businesses like McDonalds and Starbucks use their WeChat pages to allow customers to find the nearest store and order products for pickup. Other companies such as Coca-Cola took more creative measures to increase direct customer interaction. WeChat users can play games in the app and then receive Coca-Cola coupons, which then go to their “wallet” for later use.

WeChat’s diverse range of features affords it a unique advantage: one-stop shopping. Unlike other apps such as Uber or Amazon that offer a narrow focus of features, WeChat allows users to carry out many activities in one place, making mobile phone use more user-friendly. The app’s efficiency has allowed it to grow to its current size in just half a decade while also bringing in high revenues for Tencent. According to the BBC, WeChat’s growth helped Tencent overtake the better-known Alibaba as China’s most valuable tech company in August 2016. Tencent was valued at $249 billion, $3 billion more than Alibaba.

Another advantage of WeChat’s “one-stop-shopping” characteristic is that it can holistically look at users’ habits, unlike other apps that can only collect users’ habits in specific areas. This means that Tencent has the data to potentially analyze consumer markets more efficiently than other companies. The data collected from WeChat itself could also be a significant profit maker for Tencent.

With a strong user base in China, WeChat has turned its attention to foreign markets, most notably in South Africa and South Korea. In many foreign countries, more people use phones than computers. Therefore, the future of e-commerce will depend on mobile e-commerce growth. According to Gartner, a technology researching company, consumers will spend $2 billion on online shopping through their mobile devices by the end of 2016. Social media and messaging apps, especially Facebook’s Messenger, are losing out on what could potentially be billions of dollars in revenue. According to Forbes, in the first quarter of 2016, WeChat brought in $1.8 billion in mobile revenue. In contrast, Facebook’s Messenger brought in zero. WeChat’s potential to become a major player in overseas markets will increase as mobile e-commerce grows, despite the company’s moderate success abroad. Apps like Messenger need to innovate and go beyond simple messaging — otherwise many more people will be scanning each other’s QR codes than friending each other.

The oil industry is in one of its deepest downturns since the 1990s. On January 15, oil prices crashed six percent, with the Brent and WTI Index both closing at below $30 a barrel for the first time in 12 years. To put that in perspective, that is lower than it was in the midst of the 2008 financial crisis, the worst global economic downturn since the Great Depression, according to analysis by the Financial Times. It is clear that what initially began as a small price drop has ultimately resulted in an 18-month long plunge. Even worse, there seems to be little possibility for a recovery in the immediate future.

To understand the bleak state of the oil market, one must first understand the mechanics that are behind its trajectory. In 2014, crude oil prices peaked at $115 a barrel, almost four times what they are now. At first, many economists predicted that oil would continue its upward trend and fully rebound to pre-recession prices. However, a number of factors contributed to its slow, but continuous, downward slide. To begin, China, one of the biggest importers of crude oil, saw annual economic growth of only 7.4 percent in 2014, its lowest rate in 24 years. For the first time since its rocket-like expansion, it had missed its growth rate target.

Since then, the Chinese market has undergone a roller coaster-like trajectory, galvanizing government intervention and economic stimulus. While the stock market has no direct effect on oil prices itself, its fall has reinforced global concerns that the Chinese economy is heading for an abrupt slowdown, thus undermining future expectations for the sales of oil. Therefore, it comes as no surprise that the Shanghai Composite Index and the Brent Crude Index have closely mirrored each other.

The second and largest contributing factor to the decline has been the recent international glut of crude oil. Hyper-competition between oil producers desperate to cling on to their market share has lead oil production to surge over 95 million barrels of oil a day, despite declining prices, according to reporting by the New York Times. Crude oil inventories have swelled to the highest level on record. This rise in oil supply, unmatched by an equivalent rise in demand, has therefore put downward pressure on prices. Analyst Kevin Book of ClearView Energy Partners predicts that that this oversupply will continue at least until the last quarter of 2016. To make matters even worse, many of the world’s largest economies, the United States as a prime example, has moved to increase domestic production, diminishing the demand for foreign oil.

Lastly, the rallying U.S. dollar has made crude less attractive to overseas buyers. As is with any other commodity, Oil is always and only bought in U.S. dollars. Over the past year, the dollar has become stronger against most currencies. As a result, foreign importers are finding themselves spending more to buy crude oil, as they must exchange more of their local currency for each dollar.

With oil prices this low, many investors have argued that there is only room for rebound. This is undoubtedly false, as most of the factors contributing to the slide in oil prices, including China’s slowdown, supply-demand imbalance, and a the strong dollar, are likely to continue. Despite heavy economic stimulus, China will be unable to stimulate growth as it has once before, with this year’s growth projected to be only around 6 percent, according to the Straits Times.  Similarly, many emerging markets particularly in Latin America, the Caribbean, and parts of Asia and Europe are also facing economic contraction. As a result, these countries will weigh heavily on the global economy. In January, the International Monetary Fund revised their global economic outlook, lowering their growth expectations for the world economy down to 3.4% for 2016.

Lastly, the glut of oil is likely to see little to no resolution in the immediate future. With major exporters refusing to slow down production and Iran expected to become a major exporter of oil again under the nuclear deal, there is a serious possibility of the oil market not rebalancing until the last quarter of 2016. Iran’s oil minister Bijan Zanganeh believes that Iran will export 500,000 barrels of crude a day in the immediate post-sanctions period. In the six months after, this amount is set to double, with Iran exporting up to 1,000,000 barrels a day.

Thus, with oil supplies ready to rise, China’s wide-impacting economic slowdown, and rather mild predictions for the global economy in 2016, it is clear that the price of oil has nowhere to go but down.

While many companies are fighting to sell their products in China, one market brings potential Chinese buyers to American soil. The American real estate market has welcomed potential Chinese investors, often taking advantage of the Chinese desire for market stability. Chinese buyers have made their own niche market in U.S. real estate. While Chinese investors have helped raise historically low housing prices in some areas, the consequences of this niche market could be detrimental to both the United States and China. For the Unites States, Chinese property investment will cause gentrification and form small housing bubbles. In China, the amount of wealth leaving the country will hurt long term growth. Therefore, the two countries need to put limitations on Chinese access to the U.S. real estate market.

The instability of Chinese markets has driven many to look overseas for opportunities. Due to China’s slowing economy, the government has taken heavy measures to devalue the Yuan (RMB), often without any prior warning. In August of 2015, the government devalued the RMB for three straight days. While China likely made these measures to increase exports to boost the economy, it shook public confidence in the domestic market. This lack of confidence also probably contributed to the stock market crash in 2015. A cyclical process started. As the stock market fell, so did investor confidence. In addition, according to Alex Frangos, state-owned enterprises were ordered to buy back stocks. As a result, $3.5 trillion could have been put back into the market only adding to investor worries over inflation.

According to a semi annual report from the Department of Treasury, between $520 and $530 billion dollars left China for America in the first eight months of 2015. From a financial standpoint, the Chinese government flooding the market with cash caused this large sum. The government injected more cash into the economy to help industries after the recession and to lower exchange rates with the hopes to increase exports. This monetary policy combined with the previous government policies easing restrictions on moving money have helped Chinese investors move liquid cash abroad.

The United States must eventually restrict these investments. As more wealthy Chinese start investing and eventually immigrating to American cities, housing prices and the general cost of living will rise. The increase in costs will displace U.S citizens who will not be able to afford the change in expenses.  Vancouver, the destination of many wealthy Chinese immigrants, already experience this type of gentrification. According to the Real Estate Board of Canada, housing prices in September 2015 were up almost 16 percent compared to the previous year.

As the cost of daily life and business go up, existing residents and business find it difficult to cope, causing discontent to increase among local populations. In Vancouver, the increased cost of living has led to ethnic tensions. Local governments never desire a heavily divided population.  Therefore, in 2014, the Canadian government stopped its investor visa program, the program used by many Chinese to enter the country. The Ministry of Finance stated that participants were not making positive financial contributions though this statement has been criticized on racial lines.

Like Canada, the U.S. should also limit Chinese investment to avoid small housing bubbles. According to Zillow, housing prices in Palo Alto, California were up around 16.4 percent in January 2016 compared to the previous year. Chinese immigrants have been flocking to Palo Alto for years. Some have probably immigrated due to President Xi Jinping’s anti-corruption reforms. According to the Wall Street Journal, Xi Jinping has taken more measures to prevent wealthy Chinese from leaving. Chinese banks have increased efforts to hamper individuals wishing to move large sums abroad. As restrictions increase on moving liquid cash, Chinese demand for U.S. properties will eventually decline, causing prices to fall. Should the Chinese government decide to suddenly crackdown more on international wealth transfers, communities such as Palo Alto may see a sudden drop in property values, as if at the end of a housing bubble. Given Xi Jinping’s strong attitude towards corruption and emigration, it would not be surprising if the Chinese government imposes more drastic, sudden limitations in the future.

While the United States cannot predict when or if the Chinese government will impose more restrictions, it can take its own steps to slowly curb Chinese investment. One significant measure is to tighten restrictions on the EB-5 investor visa. The EB-5 visa gives a green card to anyone and his or her family if they invest at least $1 million in a commercial enterprise that can create or support at least 10 full time jobs. Many Chinese use the money invested in American properties as a way to fulfill the monetary requirement while using projects on the property to fulfil the job requirement.

The United States should increase the amount required to obtain the visa. Many Chinese investors can put down $1 million with ease. The United States could also decrease the cap on visas given per year and only offer them to the highest bidders. This would decrease the amount of people entering the United States with this visa while also maximizing investment in comparison to just a general cap. The U.S government should implement reforms slowly though. If the United States hastily restricts Chinese immigration, housing prices in cities like Palo Alto would drop rapidly, American investor confidence in the over all real estate market could shrink.

China must also do more to reverse the exodus of wealthy Chinese. The more investors buy American property, the more Yuan they dump on the currency market. While China has attempted to devalue its currency to raise exports, the increasing efforts to depreciate the Yuan in comparison to the U.S. dollar will only encourage investors to buy American properties faster to avoid further losses. While Chinese banks have stepped up monitoring if people are following existing rules that limit exporting money to $50,000 per year, this measure will not be enough in the long run. The lack of Chinese confidence in their domestic market is the root of the problem. To improve confidence, the government needs to take a more hands off approach toward the markets. By letting markets take care of themselves, investors will not have to worry about sporadic government intervention that has been historically hard to predict. When government intervention is necessary, the Chinese government should give investors warnings about what actions it might take in the future. This will allow investors to prepare ahead of time and give more certainty to the market. However, to make these approaches work, there must be consistency between different Chinese administrations. One aspect of not only market instability but also government instability is the ease with which policy can change with leadership changes in Beijing. Increasing domestic market confidence will enable Chinese to invest at home, something that may help China’s slowing economy.

While Chinese investors have helped the real-estate markets in certain areas, the benefits will not last forever. China does not need more of its affluent citizens leaving the country and the United States does not need to see small housing bubbles across the country. Both countries need to rethink current policies before these issues become bigger. When markets suddenly boom after a slump, not many think about the long-term effects of what will happen. At least on the part of the United States, the US government must not let the current success of Chinese real estate investment get in the way of looking at long term consequences.

What was initially seen as a healthy clearing of froth from one of the world’s fastest growing market has become a worrying and globally catastrophic nosedive. Over the past few months, China’s stock market has endured a roller-coaster-like trajectory. Recently, the Shanghai Composite index has hovered around $3000 per share, marking a loss of a year’s worth of growth. Investors from around the globe have watched as the Chinese government has fought, to arguably no avail, to artificially prop the market back up. Despite the government’s extreme policy measures, daily swings in the market have been extreme, peaking in a one day 8.5 percent drop known as “China’s Black Monday.”  While the changing global arena has lent for a correction in the Chinese market, the greatest change, however, seems to be in the mindset of investors themselves.

Due to extent of government intervention in its own market, many have come to see China’s market as a reflection of its own credibility and reputation. China has taken a more hands-on approach to controlling its market than any other economically significant country in the world. Preceding the crash, China’s state-owned media stations encouraged individual investors to make risky investments using borrowed money. In many cases, the aggregate of their investments exceeded the rate of growth and profits of the companies. In addition, the central government began to slowly loosen monetary policy, eventually lowering lending rates. As a result of China’s heavy involvement in the market, many investors found themselves in an arena rife with moral hazard. Investors were able to make risky bets with the cushion of the Chinese government stepping in to prevent crashing stocks. This “risk-free” environment was able to galvanize soaring levels of investment in the market, creating a bubble in the market despite economic slowdown. In one year, the Shanghai Composite had climbed more than 150 percent.

Once the market had begun to fall, China underwent extreme measures to stop the market from falling further. Despite president Xi Jinping’s expressed desire to make the Chinese stock market a more liberal and globally integrated entity, the Chinese government created and enforced an onslaught of restrictions on the market and its investors. In July, the China Securities Regulatory Commission imposed a 6-month ban of stock sales by major shareholders. In addition, officials threatened to arrest any investor found of short selling, a form of investing that essentially bets against the market. Shortly after, stock prices began to artificially rise again, only to result in China’s largest drop yet, known as Black Monday. Once again, Chinese officials searched for scapegoats to preserve their international reputation.  In less than a week, Chinese authorities arrested and questioned 197 people they blamed for “spreading online rumors” that “lead” to Black Monday.

Yet while China scrambled to defend its economy, the response of its citizens has revealed changing ideals. Although government has tried to artificially prop up the stock market and convince their investors of less volatility, the prospect of possibly losing life savings has put many investors into a state of panic. Nearly a third of the country’s individual investors (more than 20 million people) have fled the plunging stock markets. The number of investors holding stocks in the account fell from 75 million in June to 51 million at the end of July. Backed into a corner and scarred by losses, Chinese investors have looked for safer forms of investments. Many have realized that there is nothing stable to be found at home. As ZZ Xu, a Shanghai restaurateur, noted, most Chinese citizens have come to realize that they “can lose a lot of money very quickly.” With the second highest rate of urban household savings (51.5 percent), much of China’s citizens have begun to pour their money into foreign investment, specifically, real estate. Currently, Chinese investors are the leading foreign buyers of U.S. Homes, accumulating a record $29 billion dollars in annual sales. Similarly Australia’s foreign investment review body recently stated that China had overtaken the U.S. as the country with the largest investment from overseas, totaling roughly $19.6 billion dollars.  At the end of August, China’s monthly capital outflows peaked at a record high $141.7 billion dollars.

In some contexts, the increase of outward investment is no cause for panic. However, China’s current economic state leaves it particularly vulnerable to this flight. Firstly, this outpour inopportunely arises when China is experiencing slowing growth. As a result, many of the “post-economic boom” businesses that were funded through loans are already struggling to raise capital. Secondly, China is already using monetary easing to prop up its economy, and is thereby left impotent in defending its currency. It comes to no surprise that China subsequently devalued its currency, a common result of capital flight and a last-ditch attempt to strengthen falling exports. Thirdly, the imminent Federal Reserve rate hike will cause even more capital outflows, as investors will be given even more incentive to preserve their wealth in U.S. financial institutions and instruments. Lastly, volatility in Chinese markets and decreasing investor confidence has also scared away many foreign investors. On Aug 25th, shortly following China’s “Black Monday,” foreign investors pulled a record $19 billion dollars out of Chinese investments. At the end of the week, the outflow totaled $29.5 billion dollars, surpassing any weekly outflow during the U.S recession.

More broadly, the rise and fall of the Chinese Stock Market has stained the market itself permanently. While it has undoubtedly directly affected global equity and commodity prices, it is the indirect effect that will last for years to come. Unlike in other significant economies, institutional investors play a rather small role in China’s stock market. Rather, retail investors, of which more than two thirds didn’t even graduate high school, own around 80% of tradable shares.  As a result, China’s market is primarily driven by one force: investors’ confidence. With millions of individuals fleeing the market, even more are destined to follow the pack. This leaves China’s market subject to a downward-spiraling cycle. Retail investors are leaving the market because returns are poor and returns are poor because individuals are leaving the market. Moreover, the increase of capital flight will continue to damage Chinese businesses themselves. While China has already posed stricter capital regulations, and has sought to cut down on money smuggling, the flight continues to grow. As a result, the Chinese government will soon find themselves in a relatively impotent state to defend the market. With few institutional and state-owned investors to command and increasing capital outflows, their artificial stimulation will run out of steam.

This article was co-published by Seeking Alpha on Sep. 13, 2015.

Over the past few months, China’s precipitous stock market drop has been wreaking havoc in markets across the globe. In the middle of June, China’s stock market hit a seven-year peak after surging more than 150% in 12 months. Many analysts had been warning that the rise in the Chinese market was driven by momentum rather than fundamentals, since the Chinese economy seemed to be losing steam. Yet, the dramatic surge in stock prices continued unheeded until mid June, when the market suddenly turned. Since then, the Chinese stock prices have dropped nearly 40% culminating in a one day drop of 8.5% on August 24 which is now being called China’s Black Monday. According to Barrons, top strategists and money managers predict another 15% decline before the market hits bottom.

Shanghai Composite Index performance over 1 year (Source: VOX)
Shanghai Composite Index performance over 1 year (Source: VOX)

Around the globe, fears have been rising as to the potentially catastrophic political, social and economic consequences a financial crisis could have for China, its closest trading partners and the global economy as a whole. In China, individual retail investors directly own the majority of shares and their losses risk hurting the real economy and even leading to social unrest. Therefore, the rapid decline of the stock market has worried the government and president, Xi Jinping, who were already struggling with a Chinese economy that had been losing steam. Having increasingly drawn its credibility from the strength of the stock market, the Chinese leadership has become increasingly desperate in their effort to prop up equity prices.

What was behind the bubble?

The Chinese stock market bubble is largely believed to have been abetted by a host of measures undertaken by the government. The central bank had loosened monetary policy, leading to falling borrowings costs stimulating investment. Similarly, several liberalizing laws had made it easier for funds to invest and for firms to offer shares to the public for the first time.

Thus, after languishing over the past few years, the stock markets in Shanghai, with 831 listed companies and Shenzhen, with 1700, took off last summer rising to dizzying heights. Shares of newly listed companies soared, sometimes thousands of percentage points within months of their initial public offering, fueling a large amount of speculative buying among a new cadre of retail investors which included tens of millions of ordinary workers, farmers, housewives and pensioners.

As Orville Shell from the Guardian reported in “Why China’s Stock Market was Always Bound to Burst”, there were several unmistakable signs that should have raised alarm bells. First of all, Chinese stocks were climbing ever higher while the Chinese economy was experiencing a slowdown. Secondly, a significant disparity in prices between “A-shares”, which can only be purchased by investors inside China, and “H-shares” stakes in the same companies available to foreign investors through the Hong Kong exchange, should have been a telltale sign that Chinese investors were bidding up prices beyond any reasonable value.

Schell reports that , “drawn by the casino-like profits to be made in the boom, more and more small investors flocked to the thousands of brokerage houses that are now proliferating in every Chinese city.” With the Shanghai and Shenzhen exchange up 135% and 150% respectively in less than a year, stocks had begun to seem like a sure thing with promises of quick profits for the millions of Chinese investors hungry for wealth. As such, compared with the 2% annual rate of return promised by traditional bank savings accounts, investing in the stock market for those able to do so,seemed like a no brainer.

Instead of focusing its efforts on regulating the speculative boom, “The government itself had become bedazzled by the seemingly invincible rise in stock prices”, according to Schell. The Chinese government took measures that further inflated the bubble. The government itself took advantage of the rising prices to sell equity stakes in dangerously debt-burdened state enterprises and clean up messy balance sheets.

What caused the market to turn?

In mid June, investors suddenly realized that stock valuations had lost touch with all fundamentals, and the bottom finally fell out. Within less than a month, the market had suffered a 32% decline. The loss of investor confidence led to a precipitous rush to sell.

The fall has been exacerbated by the amount of margin lending that had built up during the boom. Over the past few years, there had been a substantial increase in margin lending in which individual investors borrowed from a broker to buy securities. While the market was booming this allowed small time investors to put very little money down, borrow the rest to buy stocks, and then pocket outsized profits when they sold. However, the explosion of margin lending left many households highly exposed to the risk of a drop in stock prices. As prices of securities began to fall in mid June, brokers made demand for more cash or collateral (margin call) which meant that investors had to sell immediately. .

What measures have been taken?

Since mid June, nearly half of the market, or 1300 companies have suspended their shares in an attempt to stall the steep decline. Meanwhile, in desperation, the Chinese authorities hastily enacted a series of measures which they hoped would stop the decline.. They curbed the amount of new shares issued, in order to prevent any further dilution, and enlisted brokerages and fund managers to buy large quantities of shares, supported by the China Securities Finance Corporation (CSFC), China’s state backed margin finance company which has a direct line of liquidity from the central bank. On July 4, China’s top 21 securities brokerages pledged to invest at least 120 billion yuan (19 billion dollars) collectively to help stabilize the market.

Despite these measures, the Shanghai Composite index closed the month of July with a decline of 15%, the worst it has suffered since 2009. On August 10, the People Bank of China’s 2% devaluation of the yen, enacted in an attempt to respond to their recent economic slowdown, caused stocks to drop even more over the following days. On August 14, the CSRC surprised the market and the world by announcing that Beijing was going to allow market forces to play a bigger role in determining prices, marking a dramatic reversal from its previously interventionist stance.

On August 24, following the dramatic one day 8% drop which erased all gains for the year, the Chinese central bank again cut interest rates. A few days later on August 27, senior Chinese central bank officials shocked the world by telling Reuters that wide gyration of markets over the past week was caused by concerns over a possible interest rate rise by the US Central Bank rather than any measures by the Chinese government. At this date therefore, it is not clear what the Chinese government can or will do.

Will this spread into other markets?

The effect of the Chinese stock market drop is being most immediately felt by a broad decline in commodity prices around the world. Particularly, China’s problems have further pushed down the price of oil, which briefly fell to under $40 a barrel in the United States. The price of most other commodities, notably copper and aluminum have also been undermined by the possibility that lower than expected sales to China, which is the largest market for industrial commodities.

Russ Koesterich, Global Chief Investment Strategist at Blackrock noted that the roller coaster ride in China is mainly a domestic one, because, as noted above, most foreign investors hold H-Shares that did not experience the same bubble valuations and the linkage between China’s economy and its stock market isn’t particularly strong. Nonetheless, markets around the world became jittery as the Chinese bubble continued to deflate. The Chinese “Black Monday” on August 24, caused world markets to tumble in a rout that erased $3 trillion in value from stocks globally. While most markets stabilized the next day, ending fears of a free fall, the recent turmoil caused by China has led many investors to turn their focus to government officials- who have become the most prominent players in many financial markets since the 2008 crisis. In particular, the apparent eternal debate about whether the Federal Reserve in the United States will still follow through with plans to push through an interest hike has once again been revived.

Somewhere in Beijing, Xi Jinping is pumping his fist like he just won the lottery. On April 15, the China-led Asian Infrastructure Investment Bank (AIIB) announced its official approval of 57 prospective founding members. As of that date, the bank was also set to raise $100 billion dollars in initial capital, with half of that figure being supplied by the Chinese government. Since the bank’s unofficial announcement in 2013, China has taken on an impressive, responsible role befitting of a rising world power. Yet even more noticeable is the blow the United States’ credibility has taken, thanks to its staunch opposition to the project. Seldom in international relations does U.S. policy fall so painfully flat on its face. The rise of the AIIB, however, seems to be one of those rare instances.

Indicative of U.S failure is the list of Prospective Founding Members, which are not limited to Asian powers or China’s closest allies such as Pakistan and Russia. The bank’s membership has brought together historically bitter rivals, including Iran and Israel, as well as Pakistan and India. Most astounding, however, is the fact that despite staunch pressure and condemnation from the Obama administration, some of the United States’ closest allies have signed on, including South Korea, Germany, France, New Zealand, Australia and even the United Kingdom, with Japan and Canada as the only two major powers yet to agree to the bank’s terms.

It is also important to remember that the AIIB is set to serve an important function in the Asia-Pacific Region. A 2010 report by the Asia Development Bank (ADB), a similar intergovernmental financial institution, forecasted a need of $8 trillion between 2010 and 2020 to meet physical infrastructure demands, with 51 percent being spent for electricity, 29 percent on roads and bridges and 13 percent on improvements to lacking telecommunications networks.

Skeptics, namely Washington, have cited the fact there already exists two well-established development banks in the region––the World Bank and the ADB. While there is certainly validity to the argument of oversaturation, unlike its counterparts the AIIB is geared less toward poverty reduction and more directly toward infrastructure development. Furthermore, the reality is that the World Bank and ADB’s lending capacities sit at approximately only $300 billion and $11 billion, respectively, figures far short of the $8 trillion that is required over the decade. Therefore, it should come as little surprise that World Bank president Jim Yong Kim has been nothing but supportive of the AIIB, stating, “We welcome any new organizations. We think the need for new investment in infrastructure is massive.”

The Obama administration has also voiced concerns over the governance and oversight of the AIIB, citing equal representation and environmental oversight as two potential problems. Yet the ADB and World Bank have been faced with similar problems of their own. In fact, one of the ADB’s largest projects, a coal power plant in Mae Moh, Thailand, is considered by Greenpeace to be one of the worst ecological offenders in all of Southeast Asia. As for the World Bank, a 2010 report by the United States Senate Committee on Foreign Relations noted the institution’s poor record of “achieving concrete development results within a finite period of time” and needed to work on “strengthening anti-corruption efforts.”

While it is naive to assume the AIIB will have a spotless pro-environment, corruption-free record, the fact that the bank is still in its inaugural stages means there is room to effectively work on stamping out these issues that would be more difficult in already established institutions. Indeed, at the bequest of some of its European founding members, the AIIB leadership has already begun drafting a series of environmental standards for its projects, including requiring Environmental Impact Assessment documents (EIA) and environmental management plans (EMP) in order to receive funding.

The final and most pressing concern for the U.S. government is what it sees in China using the AIIB as both a hard and soft power tool, threating the historically U.S. controlled World Bank. There should be little doubt that the AIIB is, in part, an attempt by China to force its way into a heavily U.S.-dominated scene. As Zhao Changhui, economist at the state-owned Export-Import Bank of China, candidly admits, “the founding of AIIB is a challenge to the U.S.’s economical and political dominance. It’s also a challenge to the establishments controlled by the U.S., such as the World Bank.” Yet such statements pose little threat to the United Sates. China, the world’s second largest economy, is an ascendant power that is eager to claim the authority it proportionally deserves due to its size. Rather than fight a losing battle, the United States ought to join the AIIB. As an active member, the United States would be able to work with the other members, many of whom are allies, to shape the direction of the bank in a mutually beneficial manner.

But first, the United States must loosen its fears of a rising China and the implications of the AIIB. Many in Washington perhaps fear the bank’s establishment as the formal decline of American financial supremacy. Yet China is not in the same position that the United States was in when it formed Bretton Woods at the end of the Second World War. The United States and Europe are simply too powerful to be overshadowed in such a way by China, which lacks the unipoliarity of the post-war United States. On the eve of Japanese Prime Minister Shinzo Abe’s White House state dinner on April 28, President Obama took a cue from Chinese culture and attempted to save face, remarking that the AIIB “could be a positive thing.” This about-face only further highlights China’s upper hand.

This article was co-published by Seeking Alpha on Jun. 15, 2015.

Last year, the International Monetary Fund (IMF), the most prestigious international financial institution in the world, ranked China as the largest economic superpower in the world (IMF, 2014). With a 2014 GDP estimate of $17.6 trillion dollars ($300 billion higher than the United States), China has witnessed recent economic growth that has placed it in the center of global economic conversation (IMF, 2014). Companies and businesses around the world have suddenly redirected their energy to cracking Chinese markets, opening up branches and boutiques all around China’s modernized cities. In the 1950’s, American consumerism transformed the global economy. Now, it appears it is China’s turn. Reaching $3.3 trillion dollars, China’s private consumption currently makes about eight percent of the world’s total (Economist, 2014). Walk the streets of Hong Kong at 10 A.M on a Saturday and you’ll see lines of Chinese shoppers eagerly waiting outside luxury boutiques to splurge on goods. Luxury car sales in China have risen 450 percent in the last year and Chinese consumption of expensive Swiss watches now equals more than the United States, U.K and Japan combined (Raconteur, 2015).

Income by age in the United States and China (O'Brien, 2014).
Income by age in the United States and China (O’Brien, 2014).

The unique dynamic of Chinese consumerism has made the Chinese market even more enticing to foreign companies. Not only do the youngest age bracket of the Chinese population make the most money, but they are also the most willing to spend it. Many Chinese migrant workers are engaging in a growing trend called “buying up,” in which they use some of their savings to buy similar luxury goods that the upper class buys. Research by the IDEO, a consultancy, found that many young migrant workers earning less than $830 a month would spend a entire month’s wage on an Apple IPhone (Economist, 2014). This phenomenon has triggered huge growth in companies catering to the lower class’s demand for luxury goods. Alibaba, a Chinese company centered in providing “budget smartphones” to China’s mobile users, is now the fourth largest tech company in the world with a net worth of $215 billion dollars (WSJ, 2014). The future of consumerism and the global economy, it would seem, rests in cracking the market of the new Chinese generation.

Yet, many economists are overlooking a growing trend in the Chinese population that could stalwart private consumption and diminish China’s future influence in the global economy. Despite their recent explosion of wealth, the new Chinese generation is saving more than ever. In the last 15 years, China’s average rate of urban household savings has risen 11 percent (Business spectator). At a current 51.5 percent of net income, China’s saving rate is ranked second in the world, only under oil-rich Qatar (World Bank, 2015). To put that in perspective, the average Chinese citizen saves more than three times as much as the average American. This growing savings rate is, without a doubt, a result of a feeling of instability trigged by the recent political and economic events in China. In an effort to defuse this feeling, the Chinese government has tried to enhance education, healthcare, and other public sectors etc., in hopes of loosening the wallets of Chinese consumers. Yet, savings as a percentage of GDP has continued to rise as spending’s percentage continues to fall.  The inescapable reality is that this trend in savings will only get worse. The wind steering the direction of this course has nothing to do with any of these mentioned public sectors, but rather, one of China’s defining initiatives: the one child policy.

Chinese consumer spending and savings as shares of GDP (Ritholtz, 2009).
Chinese consumer spending and savings as shares of GDP (Ritholtz, 2009).

In the next few decades, China will undergo the world’s largest demographic shits. To begin, China’s population growth has already begun to slow. From 2001-10, China’s population inched up at just 0.57 percent annually—only about half the level of the previous decade, and only one-fifth of the level in 1970, when controlling population growth first became a priority (Wang, 2012). The driving force of China’s slowing population growth rate is its low fertility rate, which has languished well below the replacement level of 2.1 births per 100 citizens for two decades. China’s fertility rate is only 1.4 births per 100 citizens, one of the lowest in the world and well below the developed country’s average of 1.7 (Wang, 2012). In the past few decades, China has repeatedly failed to reach population targets put in place to control growth. For the 10th Five-Year Plan, the National Population and Family Planning Commission set a population growth target of 62.6 million, but China recorded an actual population gain of just 40.1 million. For the 11th Five Year Plan, the population gain of 34.2 million was far below the 52.4 million target (Wang, 2012). This sustained low population growth will cause the number of young workers to decline tremendously.

By 2020, the number of people aged 20-24 is expected to fall 20 percent in China (Wang, 2012). Not only that, but the labor participation rate in this age group will also fall due to rising participation in higher education. Annual higher-education enrollments tripled from 2.2 million to 6.6 million in 2001-10, while the number of college students (mostly aged 18 to 21) rose from 5.6 million to 22.3 million (Wang, 2012). In short, China’s labor force, the foundation of its profound economic growth, is disappearing. At the same time, China will see a surge in the rise of older aged citizens. By 2030, China is expected to see its percentage of people over 60 in total population double (Economist, 2011). China’s ratio of workers to retirees will change dramatically, dropping from roughly 5:1 to just 2:1 (Wang, 2012). This huge shift in demographic will have far reaching effects beyond just labor supply. For example, tax burdens for each working-age person will have to increase more than 150 percent (Wang, 2012).

Estimated net changes in Chinese labor force (The Economist).
Estimated net changes in Chinese labor force (The Economist).

Most members of the new Chinese generation are actually saving in response to this problem. The population is getting older, and the one-child policy places huge economic strain on the new generation. Commonly referred to as the “4-2-1,” the members of the new generation will have to save enough money to singlehandedly look after themselves, their two parents, and their four grandparents (China Outlook, 2014). The most common, and expensive, purchase of the new generation will not be designer handbags and luxury cares, but rather, healthcare to help aid their family. The effect of this profound economic pressure is visible all around China. A decade ago, impoverished migrants gathered outside factories in cities like Dongguan, desperately searching for work. Now, Dongguan’s streets are full of banners and notices advertising jobs as workers protest in demand for higher wages  (Economist, 2014). As diminishing labor supply and increase in labor activism continue to pressure employers, wage rates in China are actually beginning to increase. Yet, this increase in wages represents only half of the new generation’s woes.

Factory workers protest for higher wages outside the Yue Yuen Shoe factory in Dongguan (The Guardian).
Factory workers protest for higher wages outside the Yue Yuen Shoe factory in Dongguan (The Guardian).

The price of healthcare in China has remained inaccessibly high. At the same time, China’s poor living conditions, high rates of pollution, and general crowdedness have caused it to have one of the world’s highest rates of chronic diseases among high-income countries (Strong, 2005). Specifically, China has seen a rise in the rate of cancer as a result of intensive air pollution, now estimated at an index 20 times higher than the maximum safety limit (Nelson, 2014; ABC, 2013). In a recent statistical analysis by Lancet, one of the world’s leading medical journals, China now contributes to 25 percent of cancer deaths globally (Strong, 2005). As a result, China’s expenditure on health care has increased by more than 600 percent since 2000 (BBC, 2014). The Chinese government, to little avail, has attempted to lower the cost of public health care through pledging more funds. In 2009, Beijing allotted $173 billion dollars to help alleviate the cost of public healthcare (Time, 2014).

Yet, to most of the general population, health care prices still remain too high and most health insurances may only reimburse up to 40 percent of the cost for treatment (Time, 2014). While Chinese health care spending has jumped up two percent of total GDP, China’s health care expenditure by GDP has yet to surpass many developing countries like Afghanistan (Time, 2014). As much of the population continues to wait for health care prices to fall, there are those who have simply run out of time.  Zheng Yanliang, a local of the town of Dongzang, for example, took to performing his surgical amputation himself, sawing off his own limb with a hacksaw (Time, 2014). A testament to the inaccessible prices of health care, Yanliang’s story also speaks to why so many Chinese citizens have begun to fear the uptake of sickness and have consequently raised their rate of savings. In a time of increasingly inaccessible healthcare, illness entails death for many of those who cannot afford to treat it.

Chinese citizens in Beijing wearing facemasks to prevent sickness and the inhalation of smog (ABC).
Chinese citizens in Beijing wearing facemasks to prevent sickness and the inhalation of smog (ABC).

In the next few decades, China could lose all of its key advantages that make it “the world’s next superpower.” If the population growth rate continues decrease, China’s cheap labor supply will disappear. Manufacturing companies, one of the greatest contributors to GDP in China, will find themselves scrambling to find workers and forced to raise wages even higher. Those who do work will be forced to save more to not only purchase healthcare, but also to pay off the incredibly high tax burdens. As a result, private consumption will drop, and the consumption of healthcare will increase even more dramatically then it already has. Foreign companies that invested their assets in exploiting Chinese markets will begin to find themselves stuck in slowly crumbling private market and China will find itself in the economic chokehold of a dwindling population that is become ever more frugal.

Yet, the solution to all of these problems couldn’t be clearer. A modification of the one-child policy, more affordable and accessible public healthcare, and an initiative to reduce tax burdens on future workers sprung by the huge increase in retirees would alleviate the effects of this demographic shift. But, it is the execution and implementation of these changes that will pose the greatest challenge to the Chinese government. If the health care crisis in China isn’t effectively solved, then the future of Chinese consumerism lies in the sector of global healthcare. Therefore, the future course of Chinese consumerism, and the many economies reliant on it, rests not in the hands of the new Chinese generation, but rather, the Chinese government.

For decades, the Chinese economy has been facing an increasingly disturbing wealth gap between its predominantly urban elite and rural poor even though the rapidly growing economy has helped mitigate the building discrepancy in the most destitute areas. In October 2014, though, The Economist noted that the number of rural poor declined by over 16 million in 2013 as a result of national growth. The New York Times also mentioned that month that China’s economic overhaul in the 1970s lifted 660 million citizens out of poverty. In January 2014, Chinese Premier and leader of the ruling Communist Party, Li Keqiang, in a Lyndon B. Johnson-esque fashion, declared a war on poverty. China’s celebrated its first annual “Poverty Alleviation Day” later that year, an event characterized by academics and bureaucrats attending conferences across the country about the future of its lower class. Even with these huge steps, the world’s most populous nation has a long way to fully alleviate poverty.

National growth alone is not enough to eradicate poverty; more responsible government intervention is required. Last October, the Wall Street Journal estimated that 82 million rural Chinese still live on less than $1 a day. This figure is staggering when considered alongside the statistics that roughly 55 percent of the population reside in the countryside and 40 percent of total employment is in rural China. Historic reliance on agriculture in rural areas means that urbanization, while increasing, will never help the entire Chinese population. With this in mind, the persistent poverty must be addressed by state-initiated action since mere growth has proven to not be enough. Many of China’s current poverty subsidies—especially those for villages and communities—have not been as successful as anticipated.

Part of the problem is that the statistics, while standardized, do not have homogeneous interpretations. By setting the poverty threshold at 20 cents below than the international line for “extreme poverty” set by the World Bank, the Chinese government has been able to claim a that smaller portion of its population is poor. Under the World Bank’s standards, some 200 million Chinese citizens in rural areas would qualify for substantial, government aid. While the Communist Party has not released official figures about the number of citizens receiving poverty relief, the total amount of government spending on poverty alleviation subsidies is around $2 billion each year. Xinhua, the state news agency operating out of Beijing, reported last year that multiple urban structures appear opulent while their residents are the opposite. With so much manipulation regarding what constitutes poverty and to what extent it exists, the allocation of poverty relief subsidies becomes incredibly inefficient.

Financial aid is most commonly administered at the community level rather than on an individualistic basis in China. Unfortunately, the eligibility criteria at the county level is even murkier than those for individual aid. When deciding which localities to assist, the Party usually compares the average incomes, poverty rates and inflation rates of nearby provinces. On occasion, though, it also chooses to revise from an ever-changing list of secondary qualifications. In an article from April 2015, the Economist noted that while countless Chinese localities have been listed and delisted as qualifying for government aid over the past two decades, the total number of villages receiving aid has been constant at 592. With an unofficial cap on counties receiving aid, the communities themselves have an incentive to appear poorer than they may be in reality. In essence, the poorer one appears on paper, the greater the chance of aid.

The Communist Party government’s poorly defined system of awarding subsidies to combat poverty leads to inefficient targeting. Communities that need the most help often end up being unfunded, while comparatively wealthier ones benefit. County towns like Tianzhen, which have received government aid for the past several years, do not even fall into the impoverished category by China’s present standards. Last year, a piece in the Legal Daily, a Party-owned newspaper, called into question the actual use of the funds by local government. The author argued that multiple county governments were distorting their poverty statistics, using government money and refusing to disclose how the aid had been spent. State television brought the issue of bureaucratic abuse to national attention last year when it noted that two counties in the Ningxia and Hubei provinces, both of which receive poverty relief from the federal government, each spent around $16 million on new government headquarters. Although chastised by citizens at home and abroad, the Chinese government took no action to rectify the excessive expenditures.

The smokiness of the process at virtually every level of distribution makes the government’s job of poverty alleviation significantly more challenging. A necessary step in bettering long-term outcomes, then, is the creation of a more transparent process with accountable participants. This will require a major commitment on the part of President Xi Jinping and the rest of the Communist Party. For starters, the government has to remove the cap of 592 localities receiving aid. Part of the reason so many communities manipulate their numbers is partly due to the competitive the process of receiving federal aid. Lessening competition for a select few spots would bring back some modicum of authenticity to yearly poverty figures. It would also legitimize the subsidies by making them truly means-tested, rather than a function of the connections and political clout a county may wield.

What China needs now is smarter poverty reduction, not just more of it. Such change is possible, but it has to be orchestrated more appropriately by the federal government and overseen every step of the way, rather than ignored immediately after funds are disbursed. Poverty alleviation in China is making progress, but it’s not time to celebrate quite yet.

 

China’s consumption rate has been growing at an exponential rate over the past decade and the country’s increasingly wealthy consumers have become brand-obsessed. The top five brands in 2011 for Chinese consumers were Louis Vuitton, Chanel, Gucci, Dior and Armani. Recent market research indicates this trend won’t show any signs of slowing. According to reports from leading consulting firms McKinsey and Bain, Chinese consumers will account for more than 20% of global luxury consumption by 2015 and have already surpassed Americans as the world’s biggest luxury spenders. And compared with the Japanese, who started luxury shopping sprees during the economic boom in the late ‘80s, the Chinese are consuming luxury on a greater scale and at a higher level of intensity.

Many Chinese consumers new to the luxury market choose to start their luxury shopping experiences by purchasing the most iconic items under the most famous brands (often completely bypassing lesser known labels). In fact when it comes to the actual selection of goods, Chinese consumers value the perceived enhancement of utility over the aesthetics. “For luxury consumption, it is mostly about the brand name. The design itself really does not matter much, as long as it is not viewed as ugly by the mass,” said one of the luxury shoppers during an interview.

“Sometimes you see those new bags in Vogue that are actually really ugly. But somehow celebrities all over the world favor them and your friends around you start to carry them. It somehow makes me end up buying them as well, even though I still think they are ugly,” another interviewee commented.

It appears that the more expensive an item it, the more desirable it becomes. “I do not like Prada or Gucci very much because they are often on sale, sometimes 50% off! In this way, they are not solid in value and are not good items for investment. Hermes and Chanel never have sales and their items are thus worth much more,” said one of the interviewees. Three other interviewees provided very similar comments against brands such as Coach, whose average prices are relatively lower compared with other luxury brands such as Chanel and Hermes. According to qualitative market research, many of the more accessible brands are often considered as entry points for the “beginners” among the luxury consumers and are thus avoided by the more sophisticated consumers, who would not purchase any goods except for the “It Bags” (globally popular brand-name bags) or “limited editions.”

While luxury consumption is a way to buy social capital through exclusivity, it is also a way for consumers to emulate public figures and just fit in with their more fashionable friends. The top Chinese celebrities are often the spokesperson for many high-end luxury fashion houses in China and many of them appear in public only in the latest fashion designs from top labels. For example, actress Bingbing Fan is one of the most prominent celebrity figures and is widely viewed as a trendsetter for women’s fashion. An interviewee noted, “I used to like Prada wallets a lot because their vibrant colors and girly design. But many girls around me started to use those simple and solid Hermes wallets, which are seen as the most prestigious and expensive. So I ended up using it as well in order not to feel left out.” The overriding concern here is a fear of being left out from the “ingroup.”

And it’s not just the super rich who are consuming these elite brands. Average consumers, under social competition and peer pressure, often feel urged to make luxury purchases in order to maintain a desirable social status and image even if they can’t exactly afford them. “I cannot afford any of the luxury stuff but I just want to look good when I am around people who are rich and powerful” says one of the interviewees. The Chinese also have a deep respect of reciprocity when it comes to gift exchanging. Receivers are encouraged to send gifts of a similar price tag to fully demonstrate their sincerity, even at an extraordinary financial cost.

On the other hand, not all luxury consumers are succumbing to the social pressures and expectations of contemporary China. From my research, it seems that the more experienced and sophisticated consumers show interest in a much broader range of brands, some of which have minimal brand visibility and recognition in the Chinese market. This group of consumers displays a relatively high level of confidence in their own tastes and stresses the importance of the actual design and aesthetics of the goods. Their confidence allows them the freedom to make purchasing choices based on personal preference instead of on a public one. However with an increasing group of wealthy, class-conscious, and fashion savvy consumers, don’t expect the Chinese fixation over Prada and Gucci to evaporate any time soon.

Note: This is an edited excerpt from Gabrielle Chen’s thesis on luxury consumption in China.