Shanghai In Style; Sensing a receptive market, Giorgio Armani arrives with a splash.

Byline: Dana Thomas

With technomusic reverberating off the black-draped art-gallery walls, 800 hip, young Chinese--clad in Dior corset dresses and Armani suits--swilled Chianti, scarfed down carpaccio canapes and mingled with the likes of American actress Mira Sorvino and British socialite Lady Helen Taylor. Their host? Giorgio Armani, in Shanghai last month to celebrate the opening of Three on the Bund, a luxury complex he dominates in a stately colonial building on the city's scenic quay. Inside, in addition to Giorgio Armani and Emporio Armani clothing boutiques, shoppers will find Armani Fiori (which sells orchids and calla lilies shipped from the Netherlands) and Armani Dolci (with Italian-made chocolates)--as well as two multibrand high-fashion shops, an Evian Spa, four restaurants (including Jean-Georges Shanghai) and the Shanghai Gallery of Art. "It's the biggest party of the year here," says investment banker Bao-Wen Chen, 41. "Everything is alive. There's a culture of young people who want to learn about luxury and fine dining. Shanghai is not New York or Hong Kong, but it's not far behind."

Armani admits he has come a little late to the celebration. Throughout the 1990s he hung back while many of his luxury competitors--including Dunhill, Givenchy and Ermenegildo Zegna--began extending their reach into mainland China. Armani opened his first store in Beijing in the late 1990s. Now he is eager to make up for lost time: he plans to have 10 stores in China by the end of this year, and 30 by 2008. "It's the moment to open here," he says. "You can see things are happening. Last night when we went to dinner here in Shanghai, I was surprised by the way the people were so well turned out. Formidable. Even Paris doesn't have this atmosphere, this spirit."

He's not the only one to feel the allure. Over the last few years, luxury's major players have opened modest boutiques in Beijing and Shanghai. Now that the brands are well established, however, they are investing big in those two cities--as well as spreading to the provinces. Celine, which already has three boutiques in China, is adding three more. This spring Gucci opened two new stores, in Hangzhou and Chengdu, for a total of six. Dior is opening a womenswear flagship and a menswear store in Shanghai this fall. And Louis Vuitton, which has nine stores in China already, is currently developing a Shanghai complex similar to Three on the Bund.

If they're not seeing a big payoff yet, they should soon. In a study published this spring, Morgan Stanley found that China could be a "very significant market" for luxury companies. According to the report, "If eight percent of the population eventually end up as luxury consumers, that's 100 million consumers"--almost equal to the entire population of Japan. But analysts caution that it will take several years for China to reach just the break-even point for luxury brands. "Uncompetitive prices... high import duties and taxation mean that expansion in China is a brand-building exercise," the authors write. "China will not be a big profit driver for at least five years."

Then the country may regain a shade of its former Silk Road glory. For centuries, China was the primary source for silk and cashmere, and its porcelain was once unrivaled. But that came to an abrupt end when the communists took over in 1949. In the 1980s market reforms opened China to the West. At the same time, the luxury ...