China used to be cheap. According to figures the World Bank uses to calculate Purchasing Power Parity (PPP), in 2003, a dollar’s worth of currency bought nearly five times as much in China as it did the U.S. A bag of groceries, or a hairdo, or a hotel room that would have cost $50 in the U.S. cost only RMB 90, or roughly $11, in China.
Talk to anyone in China, though — local or expatriate — and they’ll tell you that lately things have been getting a lot more expensive. When I went back to the U.S. a few months ago, I had the strange sensation — for the first time — that a lot of things were actually cheaper there than in Beijing.
The bloggers at Caixin magazine, one of China’s leading financial publications, must have had the same feeling, because they called some friends in the U.S. and put together a chart directly comparing prices for the same goods in Hangzhou, and in Boston, (which happen to be sister cities). They found, for a shopping list of groceries and fuel, that the total bill was actually larger in China ($32.44) than in the U.S. ($29.81). The price of a dozen eggs was over twice as expensive, and a liter of milk was nearly three times as costly, in China as in America.
The original chart (in Chinese) can be found here. I’ve translated an English version below (click to enlarge). Prices are stated in both RMB and USD, at a conversion rate of 6.7 RMB per dollar, and unless otherwise noted, refer to the price per 500g. Products that were reported as more expensive in China than in the U.S. are highlighted in red.
Of course, the bloggers at Caixin admit from the outset that theirs was not a scientific survey. They note the fact that several of the food items, such as tofu and bak choy, are readily-available staples in China, versus niche specialty products in America, which may account for why they are more expensive in the U.S. I don’t know why beef brisket (which is not considered a particularly desirable cut in the U.S.) is so much more expensive in China — perhaps it’s a matter of taste (the ultimate example of this would be chicken feet, which are worthless in the U.S. but highly prized in China).
Fuel prices in China are regulated, and while higher than in the U.S., are lower than in Europe. Public transport, which was not included on the list, is much cheaper in China. The point-to-point fare on Beijing’s subway is two yuan (30 cents U.S.), compared with $2.25 in New York City. A taxi from the airport to the city center costs RMB 100 ($15) in Beijing, compared with about twice that ($30) in Boston.
Personal services are also much cheaper in China, where labor is plentiful. I can still get a simple men’s haircut here for less than $10, compared with a typical $20 in the U.S. A full-time, live-in nanny costs around RMB 3,000 (US$ 450) per month (plus room and board), a price hard-stretched American parents could only dream of. On the other hand, in my experience, clothing in China costs at least as much — and often more — than clothing of comparable quality in the U.S. (there is plenty of low-quality, cheaper clothing to be had in China, but I find it tends to fray quickly).
Selective as they may be, the prices that are presented — for eggs, milk, fruits, and vegetables — do not present a picture of a Chinese economy where the cost of living is 1/5 that of more developed countries. For many products, it seems, the Chinese — who still earn far less than Americans — are now paying as much or more than Americans do. It would seem that at least some of the hard-earned income gains the Chinese have won over the past several years have been whittled away by inflation, rather than adding to their quality of life. This impression is reinforced by another back-of-the-envelope exercise conducted by the folks at ChinaHush, comparing what RMB 100 will buy you today in Beijing, compared with last year (answers include: 30 fewer apples, 90 fewer eggs, 4.5 fewer bags of instant noodles, 4.5kg less flour, and one less fish). You can check out the full story here.
Which brings us to the question of economic adjustment. Many in China who argue against moving toward a more flexible exchange rate, and allowing the RMB to appreciate in value, contend that a stronger currency (which would make Chinese exports more expensive abroad) would just be too painful for the Chinese economy to accept. In principle, they accept the need for China’s economy to shift from reliance on exports toward domestic-driven growth, but they want to find a less painful way to do it, which means keep the exchange rate where it is, or appreciating very, very slowly.
The problem is that to keep the exchange rate pegged (more or less) to the dollar, China’s central bank must continually buy all the excess dollars China earns from its trade surplus and brings in from net foreign investment, and issue RMB in exchange. Unless it runs a constantly tightening monetary policy as a counterbalance– something that China has not been doing since the start of the global financial crisis — all this new RMB being flushed into the system will generate inflation. As I’ve pointed out before, China’s money supply has expanded an astounding 50% over the past two years. The reason there’s so much liquidity in the system can be traced — both directly and indirectly — to the maintenance of the RMB-USD peg. All this new money is fueling both asset and consumer inflation.
The point is, if a country is running a chronic imbalance of payments, you’re going to get adjustment, one way or another. If you allow the exchange rate to appreciate, the adjustment will come via external prices (exports become more expensive, imports become cheaper). If you accumulate foreign exchange (FX) reserves to keep the exchange rate from moving, and you don’t keep tightening to compensate, adjustment will come via internal prices (inflation). Either way, China becomes more expensive relative to the rest of the world.
The difference is who bears the burden of adjustment. With a stronger RMB, the burden falls on producers who have to adjust to retain their competitiveness (and, admittedly, by their employees, who also have to become more competitive or find new jobs). With inflation, the burden falls on Chinese savers and consumers who find their buying power whittled away. In a sense, the RMB-USD peg is a tax — an inflation tax — on China’s laobaixing (common people) to maintain China’s export industries (but only for a time, because eventually wage and input inflation at home will undermine those exporters’ cost advantage as surely as a stronger currency would have).
I find it incredibly ironic that the two hot populist issues among Chinese citizens these days are the high price of housing and U.S. pressure for a stronger RMB. People are hot under the collar about both issues, but they never stop to think that China’s position on currency (maintaining a weak RMB) might be fueling inflation in the form of rising housing and other living costs. Of course, I don’t expect average citizens to draw the connection, but economists should.