Levis Jeans and Purchasing Power
May 8, 2008 by chunzhu
When I first came to China in 2005, I basically assumed that everything in China was cheaper than back in the states. I mean with an exchange rate of $1:8RMB, China having low inflation, and everything being made in China (no extra costs from tariffs or transportation or middlemen), it seemed to be a pretty logical assumption. However, for some reason, many of the people that I talk to here at Microsoft tend to believe things are cheaper in America after converting the prices using purchasing power instead of just the exchange rate.
Which doesn’t make much sense. Most academics would argue that the reason why China’s GDP per capita is so low relative to their standard of living is because the exchange rate only reflects the price of exportable products, which is generally much higher than the cost of goods for domestic consumption. Then it all made sense.
It is better to be rich in the States than it is in China.
The employees here at Microsoft are definitely upper middle to upper class in China. Their ‘basket of goods’ would include products that are made for export consumption, like Levis jeans, ThinkPad computers, and iPhones. Their income, though high in China, does not quite reach the equivalent levels in the US, but the products that they buy are equivalent to their counterparts in America. Combined with the fact that many goods that they purchase are available almost entirely for the export market, which means goods must be sent to America and then sent back (like some ThinkPads and iPhones), transportation and taxation costs actually go up for these high-end products. Oh, and then there’s the transformation of American working class brands into semi-luxury or middle class products (Pizza Hut), which keeps the prices of certain goods high due to the associated ’status’ of owning it.
So if it’s better to be rich in America, does this mean it is better to be poor in China?
Probably not. That’s because the difference between the rich and the poor is even larger in China than in America these days (a Gini coefficient of 0.44 in 2001 when compared to 0.4 in America [Naughton]). While the employees at Microsoft have salaries equal to that of lower middle to middle class Americans, the bottom of Chinese society would have incomes of around two thousand RMB a year. Even when using PPP to adjust the income, this would still be much lower than the poorest people in America. However, this really isn’t a fair comparison.
By looking at the quality of life indexes, China would probably be at the same level as Turkey and the Philippines, ranking a little above Vietnam and Indonesia while being just below Brazil and Thailand. This was based on statistics from 2003 (Naughton), so China has probably moved up the list a bit since then.
So why is it that I make less money than I did in the States but am able to save over 80% of my income? The only reason I can think of is my failure to adjust my lifestyle from that of a poor college student to a middle class Chinese person. So my quality of life index would probably be the same despite an increase of purchasing power. Or maybe it has decreased a bit since I can no longer get good philly cheesesteaks or carne asada super buritos… but those ‘happiness index’ things are so hard to measure…
your Microsoft colleagues in Beijing are not buying ThinkPads(I think ThinkPad are not going through the state and come back) or iphones everyday but their transport cost, their food, their grocery shopping, their public school fees, their electric bill, their cable TV bill, their plumber bill, their electrician bill, their strata fee, their car service bill etc are all lower than in the US.
“It is better to be rich in the States than it is in China.” is not very accurate.
ThinkPads are actually much more expensive in China than in America because of the idea that it is a ‘high quality’ product, which allows Lenovo to price them very high despite it being made in China.
To be rich in general means you don’t have to worry about the costs of all lots ‘little things’ that you listed.
Think about it: the cost of a BMW any luxury car in China is actually much higher than in the states. The cost of one luxury car is equal to ten years or so of normal living costs. Even the cost of a ThinkPad in China is equal to several months rent of in a decent apartment.
Because the ratio money spent of ‘luxury’ or ‘higher income products’ than the everyday living expenses is much higher in China than in the States, I believe that it is better to be rich in los Estados Unidos than in China.
the little things includes mortgage makes up the most of the family budget including the rich in the west
I agree the luxury items like BMW are more expensive in China than in the states.
better to be poor in America. the poor in the states can still have cars and houses and other basic living condition. poor in china really have no much than nothing sadly.that’s one of the big problems the government and people need work together to solve
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Have you been on zhongnanhai recently? if you see the few latest posts you will know how far those guys up to ?
Eh… in case you haven’t noticed from most of my replies and posts…
…I don’t like confrontation… so I haven’t really been to zhongnanhai for a little while.
“I don’t like confrontation”
good on you
are you going to stand in front of carefour store again this weekend?
I might take a nap in the shade outside Carrefour, but I definitely won’t be standing.
i can sell iphones!!!
i tried to be a revolutionary at work but my uprising was suppressed by someone who thinks i’m “upsetting people” and “creating an unhealthy working environment”
having finals recently so i did not read most of your recent articles…
however i’m interested in learning how you think of this:
http://www.nytimes.com/2008/05/06/world/asia/06china.html?fta=y
@ Jh - Good luck on your finals… I vaguely remember what does were like…
As for that New York Times article, the environment is one issue that the CCP seems to be more ‘lax’ on. There are lots of NGOs that pop up, people criticize China’s environment all the time, and those types of protests tend to get some official media attention.
Of course there are a lot of restrictions on the environmental NGOs because the CCP fears that it will lead to branches of pro-democracy or political reform movements (which has happened), but the environment is one area that the CCP seems to be genuinely concerned about. As a result, ‘people’ oversight and ‘checks’ on the governments actions in this area are generally semi-acceptable.
you got a good perspective here. looking forward to hear a new post from you.
If you’re making comparisons in terms of affordability, then it’s not surprising that certain products are more expensive here. China still is, afterall, a developing country. However, there is a large elite class that can afford the higher prices on luxury items. My view is if you’re fortunate enough to be part of this elite class, then these general comparisons based on affordability don’t apply and you’re living quite comfortably here even compared to in western countries.
On the otherhand, even if we were to compare absolute costs, there are many essential products and services which are much cheaper here. Such as groceries, eating out, getting a haircut, etc. Also housing/rent, if you compare with major western cities. This would explain why you are able to save so much of your income. Of course, in affordability terms for the average Chinese worker, these costs are by no means low, but as someone already commented there is no question that the poor here have it tough.
If you were trying to live a western lifestyle over here, I think you know that you won’t be saving as much as you do now. Of course, there are many working-class folks who choose to buy expensive name-brand goods. We get that back home too - it’s not just a China “status” thing.
I’ve admit that it’s definitely harder for middle class over here to present themselves as being upper class, such as by driving a BMW. Back home we’d call them “poseurs”. This isn’t only due to the higher cost of luxury cars, but also because of the unpopularity of taking out auto loans and the lack of auto leasing. I think that you’d be surprised by how many of the so-called “upper class” folks back home are actually heavily laden in debt and have very little net worth.
In closing, everyone has their own definition of comfort and success (ie- ‘happiness index’). To you that may mean being able to dine at good restaurants and drive a luxury car. To your neighbour, it may be the rewards of raising a family or running a successful business. But to state that the upper class here don’t have it as well because BMWs cost more in China is a very broad generalization to make. I wonder how many expat execs would agree with you?
@Anonymous - Ah, you make some good points that I didn’t think about.
I’ll respond just to your first paragraph. Even though the higher costs of certain goods might not impact the ‘upper classes’ very much, I also think the availability of luxury goods is wider in the US. I was reading this one article about this rich Chinese guy that owns an energy efficient appliances company. He likes airplanes, but he can’t buy one in China because they’re not high enough quality. For him to get one, he has to go abroad to find one that suits his needs.
For those who are ultra rich, the expensive toys that they want aren’t available domestically and they must go through the hassel of ordering it internationally. For those who are upper middle class, the cost of semi-luxury and brand name items are the same cost as in America while their incomes are lower.
Now this only applies to the people who are interested in obtaining the ‘image’ of the upper class instead of just achieving that financial status. For those who don’t want to show off their wealth, life expenses are much lower, which spares the majority of their income for investment or opening foundations to teach poor peasants how to read. However, these type of people are generally in the minority.
One thing I have learned; the Chinese have the art of being poor down to a science. I have seen my Chinese friends make entire meals out of only a few scraps of food. They know how to live on nothing. Consequently, when they come to the States, many of them really prosper because they don’t spend much of what they earn.