(Bloomberg) -- One of the hottest commodities in China right now is a pair of sneakers.
The SoleFly x Air Jordan 1 in black patent leather rocketed in value by 6,600% to a high of 75,999 yuan ($10,730) on the online marketplace Nice after its release in December. Only 223 pairs of Nike Inc.’s retro high-top were made for sale, according to online magazine Sneaker Files.
The model is among the most profitable sneakers traded on the exchange created by Beijing-based Nice App Mobile Technology Co. Such outsize returns are hard to come by, but they've nonetheless caught the attention of sneakerheads like Lei Xiaoming, 20, a mechanical engineering student in Huangshi.
Lei has collected limited-edition shoes for years but only started investing in them in April.
“Prices were surging so much I thought it would be a better choice to sell them rather than wear them,” he said. “It’s more exciting than trading stocks.”
Since then, he's spent about 200,000 yuan buying more than 200 pairs—mostly Air Jordans and Adidas AG’s Yeezy line, a collaboration with rapper Kanye West. He’s earned profits of about 100,000 yuan by reselling some, he said.
Across China, more than 10 million monthly active users frequent online-resale apps, such as Poizon, Nice and DoNew, according to Chinese data-mining company QuestMobile. While many products suffer from the effects of the trade war, pairs of collectible sneakers are flying off the shelves, and that’s attracting the attention of U.S. sneaker exchanges StockX and GOAT—as well as China’s central bank and state media.
“China will soon become the sneaker capital of the world”
Most of what’s traded on these platforms are basketball sneakers—a testament to China’s love of the sport, even as the NBA faces backlash for a Houston Rockets executive’s tweet appearing to support Hong Kong’s protests.
The buzz over shoe reselling made a unicorn out of Poizon, developed by Shanghai Shizhuang Information Technology Co. In April, funding from Digital Sky Technologies vaulted its valuation to $1 billion, according to CB Insights.
China’s sneaker-resale market exceeds $1 billion in value, said Scott Cutler, chief executive officer of Detroit-based sneaker exchange SoleTrade LLC, known as StockX.
Chinese investors long have speculated in alternative assets, including cryptocurrencies, fiery liquor from Kweichow Moutai Co., and garlic.
Now, sneakers have their attention. Unlike Chinese stocks, which only can move 10% in either direction, there’s no cap on shoe returns.
“As with all frothy assets, there’s no telling where the peak is,” said Yu Yingbo, investment director at Shenzhen Qianhai United Fortune Fund Management Co. “As long as there are high returns, there is going to be money chasing them.”
Sneaker collecting went mainstream in the U.S. after Nike launched Air Jordans in the 1980s, and the trade went digital with eBay Inc. about a decade later.
Today’s technology makes the trade more sophisticated. Apps collect bid and ask prices, chart costs and volume in real time, and allow users to share investment advice. Some also let customers buy coupons that can be traded for shoes before coveted models arrive—in effect selling sneaker futures.
Now more-established trading sites in the U.S. want a piece of the action in China.
StockX plans to introduce local payment and language support this year, said Cutler, previously the head of global listings at the New York Stock Exchange. China already comprises about 10% of StockX’s transaction volume.
Culver City, California-based 1661 Inc.’s GOAT launched a mini-app on WeChat in July after receiving $100 million in funding from Foot Locker Inc.
“China will soon become the sneaker capital of the world,” said Henek Lo, general manager of GOAT China. The demand from Chinese millennials is “something we haven’t seen anywhere else.”
Significant rewards typically are accompanied by significant risks, and sneaker trading is no different. Of more than 2,600 collectible models sold on Nice, 56% lost value, according to company data. Only 0.4% of footwear saw returns of more than 1,000% on the app.
But Tian Hao, 27, is convinced he’s cracked the code. These days, his 90-square-meter (969-square-foot) Beijing apartment mostly serves as storage space for his inventory, which he estimates to be worth hundreds of thousands of dollars.
There’s hardly any space to walk around in his living room, where hundreds of shoeboxes are stacked up on the sofa, TV console and coffee table.
As Tian runs low on space, he's stashing sneakers with a friend. In return, Tian helped him invest 260,000 yuan in sneakers. After splitting the profits, they each cleared 90,000 yuan in two months.
“This is one of my luckiest investments this year,” Tian said. “My friend can’t stop admiring me.”
Operating in a country known for its copycats, Poizon and Nice say they have strict processes to ensure they’re selling authentic products. Poizon hires “hardcore master-level sneakerheads” to inspect every shoe, including packaging, labels, stitching and glue, and it issues certificates to verified products.
Nice’s inspectors smell shoes to check if the glue passes the sniff test.
“There are so many details—the material, the label, the box, etc.—it’s extremely hard for knock-offs to get it exactly right,’’ Nice CEO Alex Zhou said.
Both Poizon and Nice offer guarantees against fakes, promising to compensate buyers at triple the value of their fraudulent purchases.
Lately, though, the Chinese apps are concerned about deflecting the government’s attention. It may be too late. An article published in June on state-run China Daily mentioned Poizon and StockX, calling out sneaker resellers for the “chaos” in surging prices.
And this week, the Shanghai branch of the People’s Bank of China warned the city’s financial institutions about the risks associated with sneaker speculation, according to people familiar with the matter. It said the resale platforms are a “financial game of hot potato.”
Adidas discourages the reselling of its sneakers, the company said. Nike did not respond to a request for comment.
Poizon has since spoken out against flipping shoes and in August stopped offering storage space that enabled traders to avoid taking deliveries.
“Shoes are for wearing, not for speculation,” said Charles Xing, the head of marketing.
Poizon CEO Yang Bing declined an interview request.
Nice also cautioned against the practice in a Sept. 27 WeChat post.
“Don’t embark on the unreturnable path of speculation for the greed of short-term profit,” Zhou said. “It’s going to harm others as well as yourself.”
The app suspended price charts, a leaderboard for price performance and discussions about investments.
Still, that’s not deterring resellers like Tian, who said he expects to continue trading for the next three to five years.
“The ‘chives’ who rush into this market may leave,” he said, using a nickname for bandwagon investors. “The sneaker lovers and collectors will be enough to nurture this resale industry.”
--With assistance from Jinshan Hong, April Ma, Shelly Banjo and Kevin Dharmawan.
To contact the editor responsible for this story: Alice Truong at email@example.com, Michael Tighe
For more articles like this, please visit us at bloomberg.com
©2019 Bloomberg L.P.