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Why China’s Retail Prices Are Surprisingly High

August 30th, 2010 Leave a comment Go to comments

Ming Dynasty porcelain detail from China First CApital blog post

Making things in China is cheap. Buying things in China is not.

People living elsewhere, or ones like me who move here, will be rather surprised  to find out how expensive prices are for many of the more familiar brand-name products on sale in China. At current exchange rate of 6.78 renminbi to the dollar, many goods and services in China are sold at prices similar to the US.

Years ago, the Economist came up with their “Big Mac Index” as a way to measure real exchange rates. In their most recent survey, the renminbi looks 48% undervalued, because a Big Mac costs $1.95 in China, compared to $3.73 in the USA.


Big Mac Index
Source: The Economist

Of course, those prices tell only part of the story. Chinese wages are about 1/15th America’s. So, while it takes an average working American about ten minutes to earn the money to buy a Big Mac, in China, a reasonably well-paid office worker would need to toil about about four times as long to earn the Rmb 13 needed to buy a Big Mac. By this measure, the price of a Big Mac in China, to truly equal the price in the US, should be about 33 cents, and therefore the exchange rate should be over Rmb35 to the dollar.

Of course, the renminbi is never going to get that low. In fact, the overwhelming likelihood is that renminbi will get much stronger than the current rate of 6.78 to the dollar. Upward pressure comes from China’s $2 trillion in foreign exchange reserves and large balance of trade surplus with the US. As the renminbi rises in value, the prices of many goods in China will become even higher, when translated into dollars, than those in the US.

How expensive are things in China? To find out, I did a little comparison shopping at the Wal-Mart closest to my office in Shenzhen. As in the US, Wal-Mart in China is highly successful, and got that way by offering “low everyday prices”. Considering the big gap in income levels between US and China, it would be a fair assumption that prices at Wal-Mart in China would be appreciably lower than those at Wal-Mart in the US.

But, that assumption would be wrong, for the most part. Here’s a rundown of prices on some popular branded products at my local Shenzhen Wal-Mart — prices below are in renminbi and current dollar equivalent at prevailing exchange rate. Quite a few are Procter & Gamble products. P&G are very strong in China, and its products are often market leaders. As in the US, P&G enjoys a close relationship with Wal-Mart.

 

PricesSource: Peter’s Shopping

 

A few days after my visit to Wal-Mart in Shenzhen I flew to New York on business. In between meetings, I did some comparison shopping. 

Wal-Mart is the largest retailer in the US, but does not have any stores in New York. One reason is New York City’s unfriendly labor laws that would make it hard for Wal-Mart to operate in New York without unionized workers. Instead, I checked prices at local Food Emporium supermarket, Walgreens and CVS

While there are some pretty good deals in China, for example Heinz Ketchup and Coke, most things on the list are in line with prices in the US.  In other words, they do not reflect the vast differences in average earnings and therefore purchasing power.

Chinese workers manufacture wholesale, but buy retail.

Prices in China are high, in part, because there is a VAT of 13% on most things. More important, retailing in China is not nearly as efficient as it is in the US. While Wal-Mart is successful in China, it doesn’t enjoy anything like the market share it does in the US. Smaller, but my guess is, far more profitable. Wal-Mart faces very limited low-price competition in China. Most stores are of the Mom-and-Pop variety, which keeps overall prices high. Urban real estate is also expensive, and that also has an underlying impact on consumer prices.

In China, it’s easier to make money selling than manufacturing. Retail margins are higher and less squeezed than they are in the US. This will likely be true for many years to come. For Chinese consumers, especially the +40% who live in cities, they will likely continue to pay prices on par with those in the US, while earning appreciably less.


  1. Edward Lu
    August 30th, 2010 at 17:21 | #1

    It is true. Sometimes I prefer to buy in the US rather in China. It is much cheaper there than here especially for some brand products.

  2. September 5th, 2010 at 18:52 | #2

    I don’t completely agree. I also live in Shenzhen, and have found that you can live as expensively or as cheaply as you choose. Here are two examples: 1 – I live in a beautiful 140 m2 (1550 [email protected]) apartment in a very nice area (gated apartment complex) of Shenzhen. I pay USD850 per month, which is market value for our complex. The comparable apartment in a similar area in NYC, Chicago or LA would be 3X that or more. However, if I chose to live in another more prestigious development very close to me (an area popular with people on expat packages), I could pay USD 2500 for the same sized apartment. OR, I could choose to move to BaoAn District of Shenzhen and pay half what I am paying (although still in a very beautiful gated apartment complex). 2 – For lunch, I tend to go cheap, which is 6-12 RMB for a lunch ($0.88 – $1.76!!). However, I could pay anywhere from USD5 for a moderate priced lunch to USD20 for an expensive lunch at a local hotel. I could provide many, many other examples – transportation, alcohol, appliances, plumbing services, haircuts, etc. However, if you are looking for a SPECIFIC branded good (not service) with identical quality, as pointed out in the story, you will generally pay as much or more in China than in the USA. If you are buying a service or a China branded good, you can pay very much less.
    Carlton Harris (from Hua Qiao Cheng)

  3. Steve Jing
    September 6th, 2010 at 18:12 | #3

    Indeed, agree with anthor’s assessment. “Surprisingly high” is the right word compared to the wage difference. It may not be so “surprising” if one considers the other factors or costs of running a retail business in China. Cost of transportation is rising very fast, and has become a larger part of the cost of retailing. Also, the poor creditworthiness among many suppliers and vendors has caused higher asking prices to offset the potential default or late payments.

  4. K. Liu
    September 7th, 2010 at 16:02 | #4

    The article is right on. Five years ago, before I moved here, I was told that one renminbi in China has similar value as one dollar in the US. What a lie/farce that was. Retail prices are unreasonably high here, as are the real estate prices, but that’s another story.

  5. September 9th, 2010 at 11:54 | #5

    Lipton tea? Purina dog chow? Razors? Seems like there is a cultural bias at play here. Using items like rice, oil and cabbage might be more representative conumer items that reflect local lifestyles.

  6. K. Liu
    September 10th, 2010 at 18:22 | #6

    @Eileen

    For your reference, an average bag of 5kg rice runs about RMB 25-30, which translates to ~US$10 per 25lb bag. Organic varieties will run 2-3x this price. And, yes, they are produced domestically. Local peaches, during peak season, runs US$1.2 per pound. Bananas run ~35-60 US cents per pound, depending on where you shop. These prices are comparable, if not higher than similar items in the US–if not on an absolute basis, then definitely on a relative (to average income) basis.

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