Comments on: Purchasing Power Parity – The Smart Way to Buy in China

By: Geoff Fluery

Geoff Fluery — Mon, 20 Oct 2008 01:20:02 +0000

The cost of the taxi I took to Beijing Capital airport from the West side, including the toll road: RMB78 (US$12), no tip expected, journey time 1 hour. At Newark to Manhattan, a comparable distance, slightly less than 1 hour, but also including toll, US$61 plus an expected tip of at least US$10, total US$71 (RMB482). A purchasing power parity of China being six times better value. And the Chinese car was newer and cleaner.

By: Jeremy Wegerer

Jeremy Wegerer — Sun, 19 Oct 2008 02:56:11 +0000

I agree with Mr. Schimmer and Mr. Li above. You can find a 5 RMB haircut still out on the street in some neigborhoods in Beijing, but 20-30 RMB is what you’ll pay for a basic haircut at an average salon. My guess is that the laughing had more to do with the fact that he got a cheap haircut rather than spending more at a nicer salon as many of the nouveau rich will do here. You still get what you pay for, and in general it costs just as much if not more in China than the West if you want comparable quality or productivity, from commodities and services through to the labor makret as Mr. Schimmer points out.

By: Gary Shamus

Gary Shamus — Fri, 17 Oct 2008 12:54:00 +0000

I stay at the art deco Park Hotel in Shanghai for less than USD100 and in New York you’re talking about USD600 for a room at the similar art deco Algonquin: 1-6. It depends upon the product, service, where you are in China and also whether or not the product is imported (subject to duty) or not. A lot of variables. As a generalization you can more for your money in RMB in China if you try a bit harder. There is a lot of wasteful purchasing by foreign buyers who think they can get a good deal but are still actually paying over the odds.

By: Laurentius Metaal

Laurentius Metaal — Fri, 17 Oct 2008 09:38:17 +0000

The PPP comparison tries to take goods and services that are similar in both countries, regional differences apply and of course prices are not a constant. It is, as Chris pointed out a way to figure out what local money buys. For institutions like the World bank it is useful as to find out the poverty rate in a country. You need one unified currency to compare countries and PPP is the best we have at the moment.

The Big Mac index was invented because McDonalds gets most materials locally for their restaurants and carefully adjusts its pricing as to make sure the largest possible group of clientele can afford their goods. It really works very well as a means of comparison.

By: Xiaohong Schimmer

Xiaohong Schimmer — Fri, 17 Oct 2008 08:04:37 +0000

Being a chinese living in Germany and often travel back to China, I don’t quite agree with the extreme examples Chris Devonshire-Ellis made. Go to a place for a 5 RMB hair cut you most probalby don’t care if you get a clean seat; a hotel with 200 RMB room rate you sure don’t want to know the hygiene of the bedding. It’s true that it’s cheaper to live in China compared to the states, but it means also the lower standard of living at the same time. Check the express way between Suzhou and Shanghai, it’s only a few years old and the road condition is already so bad that it has too be rebuild. People often ignore the quality and details in China. The same also applies to recruiting, get qualified people and want to keep them in the company, you pay much more than the avarage and don’t forget: their payment raise expectation is 10-15% per year, otherwise they change companies.

By: Li Zhong Qi

Li Zhong Qi — Fri, 17 Oct 2008 06:16:06 +0000

Hold on. I’ve just back from Beijing this Monday. The price level there is quite high. 1:1 PPP cannot be simply drawn. Cost level in China varies a lot from more advanced east-coastal cities and metropolies like Beijing, Shanghai and Guangzhou to third-tier cities and rural countries. In Beijing, i don’t think you can easily find a salon with hair cut for man for only RMB5. Take a more commonly referred Big Mac Index (July 2008) by the Economist, RMB to USD with McCurrency PPP is 3.5, i.e., USD100 equivalent RMB350 in Big Mac price. Hence the current RMB rate is about 50% undervalued.

By: Kam Liu

Kam Liu — Thu, 16 Oct 2008 15:44:24 +0000

It won’t be 1/3rd or maybe not even 1/10. I will vary greatly upon the specific type of product or service and upon prices of commodities, especially if they are State controlled, as they often are in China. But the point that you need to focus on the local currency and not the US$ when purchasing is well put and I think the actual intention of the article. Prices fluctuate, even in China, Lauentius Metaal.

By: Laurentius Metaal

Laurentius Metaal — Wed, 15 Oct 2008 18:58:27 +0000

A basket of goods and services that cost 100 USD in the US would cost about 1/3 rd in China, not one tenth. This is from about two years back. This follows from the concept that the RMB real value/exchange rate with the USD should be around 3.5 .

Of course there are exceptions but the PPP rate is being composed of a mixed bag of goods and services and in my experience this rate is pretty accurate in China. Now petrol has gone up a bit the rate might be even a bit less favorable.

By: Steve

Steve — Tue, 14 Oct 2008 17:39:24 +0000

Ha ha Yes, with Chinese labor wages at US5,000 per annum, land at USD25 a meter, and profits tax of 25% it does make the local value of the RMB increase significantly. Excellent thread I’d never thought of the RMB/US$ in these terms before, thanks. I’m wondering if my Rochester Head Office will get it though. I can imagine trying to explain it to them (our global purchasing is US centralized) maybe we get Chris Devonshire-Ellis to try? Is he available?

By: Mark Pegler

Mark Pegler — Tue, 14 Oct 2008 13:37:15 +0000

Great post. I guess this has a lot to do with the China & Emerging Market wages being far less than US, and also land costs, taxes and so on. But a good point well made. If China had US salary levels at USD50,000 per annum, land prices at USD125 a square foot and a profits tax rate of 35% then it wouldn’t have that purchasing power parity where RMB100 buys the same locally as USD100 either.