Market research by Euromonitor shows 80 million Chinese migrating into the middle class bracket as of January 2007. By 2020, that number is expected to hit 700 million. White-collar urban residents earn upwards of US$ 12,500 a year. Though low by American standards, this income level in Mainland China means an employee can scrimp and save enough for a Gucci wallet, a Prada belt or a pair of Jimmy Choos.

Luxury brands are working hard to secure themselves a piece of the world’s biggest consumer pie. Versace is investing more than US$ 56 million in increasing its presence in Asia, with a specific focus on China, and is slated to open 11 new stores across the region this year. The Italian fashion house gave its first fashion show in mainland China in Beijing’s Legation Quarter, the former residence of the American ambassador that has been turned into one of Beijing’s trendiest—and most expensive—venues.

Last fall, MaxMara threw a party in Beijing’s trendy 798 art district, inviting more than 1,000 guests to sip champagne in a huge converted metal drum, while Fendi threw a four-day extravaganza on the Great Wall, creating a catwalk on a stretch of what used to be China’s defense against incoming barbarians.

But far and away the most successful brand is LVMH. Last year the company posted a 2 percent increase in profits, far above the industry standard for the same period. Most of this growth was attributed to the burgeoning China market.

LVMH has done an excellent job of brand positioning, says Ben Cavender, senior analyst at China Market Research Group. It has succeeded in securing the particularly enviable position of gaining a following among the top percentage of China’s wealthy. As the financial crisis stretches on, LVMH customers in China still have money to spend.

LVMH’s brand imaging, which relies heavily on pushing its European heritage, is so successful that it has benefited other brands by proxy, says Paul French, one of the founders of Access Asia, a group dedicated to tracking regional consumer and marketing trends. “Everyone hangs on the coattails of Louis Vuitton’s brand imaging in China.”

It also effectively reduced unit prices by moving production to China but keeping retail prices the same, he says.

Gucci is also enjoying a great amount of success in the Middle Kingdom, luring in first-time consumers with simple wallets and accessories. “They have made their products attainable,” Cavender says.

China’s rich are still getting used to the power of their yuan, and they approach buying luxury brands with no small amount of trepidation, Cavender says. New consumers are unsure about buying extravagant luxury goods but still want to flaunt their wealth. “When Chinese buy, they are thinking, ‘how am I going to use this?’” Cavender explains.

As private enterprises, most luxury goods companies keep hard numbers about their own sales close to the chest. But—with the notable exception of Gucci, which ranks alongside Louis Vuitton as the most successful foreign luxury brand in China—some brands are having problems luring in the consumers they so desire.

A major obstacle to success is ignorance of the Chinese market and the varying tastes and consumption habits in different regions of the country. What constitutes fashion in Shanghai is very different from what the hip kids are wearing in Beijing.

Retail strategy also faces a challenge. Taxes on luxury goods in Mainland China are high, with a 17.5 percent value-added tax, 10 percent consumption tax and an average 24 percent luxury tax slapped on high-end goods. As a result, just one-third of all luxury goods purchased by Chinese consumers are bought on the mainland.

The majority of mainland luxury purchases come from China’s newly wealthy in second- and third-tier cities like Dalian, and these consumers regularly run into problems obtaining visas to travel outside the country. Because they can’t make a run to Hong Kong or Tokyo to pick up the latest fashions, they head to Beijing and Shanghai instead.

Successful brands like LVMH recognize their mainland stores serve mostly as advertisements and invest in them accordingly.

For big names, renting retail space is a piece of cake, French says. Most luxury brands pay next to nothing, as realtors are hungry for name brands to draw in crowds to any of the large number of new shopping complexes and malls popping up around the country. Ads are often also free, and since many brands have already moved production to China, logistics and storage costs are decreased.

However, some luxury brands in China are making a critical mistake at the consumer level: Many luxury goods purchasers simply don’t like to shop in Mainland China, Cavender says. “People don’t feel welcome in stores.”

Though industry names are starting to deal with the problem, the high staff turnover rate on the mainland means that luxury goods staff are often woefully undertrained and uneducated about the brand.

Rags-to-riches Chinese may want to buy luxury clothes but are unsure of how to mix and match, Cavender says. Untrained sales staff can exacerbate the problem, resulting in a loss of customer confidence in the brand.

Many brands also make the mistake of stocking shelves on the mainland with last season’s lineup, or even last year’s. Mainland China consumers are wary of this practice. “They’re getting the old stuff,” Cavender says. “They want the latest fashions.”

Some brands have recognized this and are putting increased efforts into showing Chinese consumers that they are at the top of the priority list. Porsche, for example, recently released its first sedan in six decades, the flagship Panamera, in Shanghai. Mercedes followed suit, launching its four-door S65 AMG sedan there as well.

According to French, image is key in China. Brands that wield advertisements emphasizing style and European heritage are likely to move ahead, regardless of the accuracy of the advertisement.

Ads that feature French seamstresses slaving over detailed stitching a la LMVH or public schoolboys frolicking with Kate Moss a la Burberry effectively obscure the reality that the product was put together with glue by a 17-year-old girl on a production line in Zhejiang province, he says.

“European labeling regulations are dead easy to get around,” French says. Meaning that though the majority of a luxury bag was assembled in China, if the idea or designs come from Europe, all that represents the Chinese effort is a small, barely noticeable Made In China tag stitched along an inseam.

So why do Chinese consumers continue to spend thousands of yuan on goods produced domestically?

French explains that if someone buys into the idea that a particular good is luxurious, it’s very, very difficult to break them out of that impression.

“When you try and tell them differently, they just switch off,” he says. “It doesn’t register.”

Laura Fitch is a Beijing-based freelance writer and photographer. She has lived and worked in Japan and China for almost a decade, writing stories that cover everything from F1 racing and pop culture comic illustrators to business and politics.