This news article reports that "luxury fashion and leather products are about 60 percent pricier in Mainland China than in the Eurozone." How do you explain this price difference?

 

b. Assume that purchasing power parity were true in the pricing of these luxury fashion and leather products. How would the "euro's weakness against the renminbi" affect the prices of these products in China?

 

c. How do you understand "the exchange-rate bonus" as stated in this report? Illustrate with a hypothetical example if possible.

 

Transcribed Image Text:

China's luxury malls on weekday afternoons are usually long on bling and short on shoppers. But at the Chanel store at Shanghai's ultra-glitzy IFC mall, dozens of people queued on Friday for a rare opportunity to buy luxury items barely more expensive than they would be in Paris. For years, Chinese middlemen, or daigou agents, have ferried items from Hong Kong and even Europe back to shoppers only too keen to avoid the mark-ups that luxury brands often place on their "sold in China" products. - as well as the hefty taxes on luxury goods in Mainland China. The euro's weakness against the renminbi has stretched traditional price differentials between Europe and China even further. According to Luca Solca of Exane BNP Paribas, luxury fashion and leather products are about 60 per cent pricier in Mainland China than in the eurozone. The increasing gap - it was about 40 per cent only last September - has fuelled a trade that many brands, including the privately owned Chanel, say damages their image, confuses shoppers and encourages fakes. Meanwhile, the internet has made it both harder for luxury brands to hide the higher prices in China and easier for Chinese consumers to find third-party luxury sellers online. Chanel said it would standardise prices on three of its best-known handbags, the 11.12, the 2.55 and the Boy bag. "This decision will enable us to offer our products to all our clients at a harmonised price wherever they are in the world," it said. It added that the strategy, which included a 20 per cent price increase on its bags in Europe, would help it to combat "parallel resell markets that are facilitated by price differences and hurt the business". Before the price changes, a Chanel Boy bag bought in China would cost Rmb35,600 ($5,740). After the change, the same bag costs Rmb26,000 — a reduction of 27 per cent. Bought in Europe, the same would have cost a Chinese person Rmb20,500. After the price increase in Europe, it is going to cost Rmb24,600. Chanel's move came after Patek Philippe, the Swiss watchmaker, cut prices by as much as 14 per cent in China. TAG Heuer, which belongs to the Paris-based LVMH luxury conglomerate, this week said it planned to freeze prices in some markets and lower them in others, including in China. One opportunity for brands that cut prices is gaining market share- even if they see the exchange-rate bonus disappear. The line of shoppers waiting anxiously outside Chanel's Shanghai store on Friday contrasted sharply with the sleepy trade at the adjacent Gucci, Cartier and Bulgari stores. But Mr Solca of Exane BNP Paribas said wider price-cutting could prove damaging. "The key point to retain and a potential risk to the sector is that more brands deciding to follow this price-cut trend would trigger a snowball effect." China's luxury malls on weekday afternoons are usually long on bling and short on shoppers. But at the Chanel store at Shanghai's ultra-glitzy IFC mall, dozens of people queued on Friday for a rare opportunity to buy luxury items barely more expensive than they would be in Paris. For years, Chinese middlemen, or daigou agents, have ferried items from Hong Kong and even Europe back to shoppers only too keen to avoid the mark-ups that luxury brands often place on their "sold in China" products. - as well as the hefty taxes on luxury goods in Mainland China. The euro's weakness against the renminbi has stretched traditional price differentials between Europe and China even further. According to Luca Solca of Exane BNP Paribas, luxury fashion and leather products are about 60 per cent pricier in Mainland China than in the eurozone. The increasing gap - it was about 40 per cent only last September - has fuelled a trade that many brands, including the privately owned Chanel, say damages their image, confuses shoppers and encourages fakes. Meanwhile, the internet has made it both harder for luxury brands to hide the higher prices in China and easier for Chinese consumers to find third-party luxury sellers online. Chanel said it would standardise prices on three of its best-known handbags, the 11.12, the 2.55 and the Boy bag. "This decision will enable us to offer our products to all our clients at a harmonised price wherever they are in the world," it said. It added that the strategy, which included a 20 per cent price increase on its bags in Europe, would help it to combat "parallel resell markets that are facilitated by price differences and hurt the business". Before the price changes, a Chanel Boy bag bought in China would cost Rmb35,600 ($5,740). After the change, the same bag costs Rmb26,000 — a reduction of 27 per cent. Bought in Europe, the same would have cost a Chinese person Rmb20,500. After the price increase in Europe, it is going to cost Rmb24,600. Chanel's move came after Patek Philippe, the Swiss watchmaker, cut prices by as much as 14 per cent in China. TAG Heuer, which belongs to the Paris-based LVMH luxury conglomerate, this week said it planned to freeze prices in some markets and lower them in others, including in China. One opportunity for brands that cut prices is gaining market share- even if they see the exchange-rate bonus disappear. The line of shoppers waiting anxiously outside Chanel's Shanghai store on Friday contrasted sharply with the sleepy trade at the adjacent Gucci, Cartier and Bulgari stores. But Mr Solca of Exane BNP Paribas said wider price-cutting could prove damaging. "The key point to retain and a potential risk to the sector is that more brands deciding to follow this price-cut trend would trigger a snowball effect."

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