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Enter the dragon, breathing fire and ready to shake the world

By Jeff Randall

Last Updated: 12:16am BST 10/09/2008

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For someone who is not that keen on shopping, I seem to have done rather too much of it. From Manhattan's Fifth Avenue through Dubai's BurJuman mall and the Boulevard Haussmann in Paris, I confess to having browsed and bargained with the best of them.

	Shanghai's Nanjing Road

Seen one and you've seen them all. At least that's what I used to believe until last week, when I took a stroll down Shanghai's Nanjing Road. It is not so much a retail centre, more a cultural phenomenon. Spend an hour or so in this hub of naked commerce and you will learn a lot about the crazy contradictions that power modern China. This is business with sweet and sour sauce.

Traditional department stores in grand colonial buildings stand next to tacky fast-food outlets and price-buster shops. Some of the world's best known fashion names - locals seem to favour Lacoste, Ralph Lauren and Louis Vuitton - trade alongside impressive imitations and crude knock-offs.

On just about every street corner, there's an illegal vendor with a selection of "Swiss-made" watches. Rolexes go for about £10, others for less. Timepieces fly when a policeman on a motorbike cruises up and the hawkers take off.

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In Shanghai, counterfeiting is the real deal: it's where the integrity of global brands comes unstuck. Eye-watering profit margins of fashion's grandes marques are sliced and diced by Chinese copiers until all that is left are racks of schmatte with price tags that would not embarrass an Oxfam sale.

Paul Smith shirts for three quid; Polo sweaters for a fiver. It's enough to make a marketing manager weep. At the level of small-time shopkeepers, the city's authorities appear happy to look the other way. But when the scale of wrongdoing threatens China's trading relationships, out comes the big stick.

On Thursday, a Shanghai court began hearing criminal charges against a gang of software pirates, accused of producing $10m of dodgy kit for overseas markets. Copyright violators in China face a maximum of seven years in jail.

Shanghai is China's richest city, with a reputation for producing top-notch wheeler-dealers. It is an intimidating urban sprawl, home to 18m people (at least that's the official figure), bursting with effort and energy. China may be run by the Communist Party, but Shanghai's neon-lit skyline is dominated by symbols of capitalist might: Hilton and Hyatt, Citibank and Coca-Cola.

It's weird. Just as panicky governments in free-enterprise America and Britain take into state ownership loss-making finance companies, Beijing is loosening further the reins on China's formidable work ethic in pursuit of private profit.

Napoleon warned: "When China awakes it will shake the world," and advised that she be allowed to sleep. Too late: the dragon is up and breathing fire.

If, as economists tell us, China is still a "developing" country, then Shanghai is leading the charge to robust maturity: for this foreign observer, it's impressive and daunting. The city's competitive forces are in the vanguard of change.

Coming off a very low base, China has achieved world-beating growth, with the economy expanding by an average of 10.8pc over the past five years. By contrast, in Britain, if the figure tops 3pc, ministers break open the bubbly.

In China's English-language press, there's a debate about the need for economic stimulus from government because growth could fall below double digits by the end of 2008. If this is a problem, it's one of the highest quality.

In July, China's retail sales were up by 23.3pc, the strongest increase for a decade. Other industrial sectors are slowing, even though inflation has eased from 8.7pc to 6.3pc, but as Citigroup's local analyst Huang Yiping points out with masterly understatement: "The [Chinese] economy is not really weak."

That's not to say there has been an easy ride for investors on the Shanghai stock market: quite the reverse. Like bubbles elsewhere in the world, it burst late last year and Chinese shareholders have suffered the financial equivalent of water torture: a steady drip-drip of falling prices and eroding values.

Tremors on Wall Street dealt them more misery last week, pushing down the Shanghai Composite Index to its lowest level since December 2006. This year, the SCI has fallen by about half. Factors affecting its performance are part global, part local, but the reaction from angry Chinese investors echoes complaints in New York, London and Tokyo: while private shareholders are scalped, rich fund managers continue to rake in handsome fees.

Hong Kong's South China Morning Post reports: "Mainland [China] funds racked up losses of 1.08 trillion yuan [£80bn] in the first half of the year, but the red ink did not stop them doubling fee income from long-suffering investors."

Many Shanghai punters who piled in at the peak - the Shanghai market index doubled last year - are convinced they were cheated. There are widespread allegations of "rat accounts" through which unscrupulous fund managers siphon off funds from gullible investors, especially first-timers. It's tempting to ask: what did they expect? It is, after all, China's Year of the Rat.

For overseas corporations looking at doing business in China, the road to riches is full of pot-holes. With 1.3bn people, many of whom are enjoying a rapid increase in purchasing power, China offers unrivalled opportunities for a sales boom. At the same time, rules and regulations can be bewildering, the Mandarin language for all but a few eggheads is incomprehensible, and getting to grips with the culture and consumer habits requires dogged patience.

To find out what it takes for a British company to penetrate China, I visited Diageo's offices in central Shanghai. The drinks group endured an unrewarding time there during the late 1990s and all but withdrew. But it is back with a new game plan that has seen staff levels rise rapidly, from 16 two Christmases ago to more than 250 today.

Ed Peachey, Diageo's commercial finance director for China, is a rare western face. His colleagues are largely smart Chinese graduates who speak excellent English after spells of education in America or Britain. He told me: "China is a big bet for Diageo. We are laying track as we go. We are still learning."

With about 16pc of China's population deemed to be living below the poverty line, according to World Bank calculations, the size of Diageo's real target market is only 11pc-12pc of the country's total. But that is 150m people, more than the combined populations of the United Kingdom and Germany.

As I discovered on the Nanjing Road, China's outward-looking, affluent classes are desperate to follow international trends and are wowed by what they perceive to be high-status American and European brands. For Diageo, that means Johnnie Walker, its best-selling whisky.

Annual Scotch sales in the UK are about 8m cases; in America 44m cases. In China, where international spirits sales are growing at about 40pc a year, the figure is just 1.8m cases. With so much to shoot for, Diageo hopes to expand its business in China tenfold in the next three years.

A fundamental trick of successful exporting is understanding local tastes. I was shocked to learn that in China the preferred mixer for whisky is... green tea. I wonder what Johnnie Walker's blenders back in Kilmarnock make of that.