Relative prices in China

Economics textbooks tell us that what really matters is relative prices, not the absolute price of a good or service.  A recent trip to China provided a number of interesting examples.

In a shopping mall in Xian my wife and I encountered a food court that was a foodies paradise, with more than 50 varieties of (mostly) Asian cuisine.  It wasn’t just Korean food, there were specific varieties such as “North Korean restaurants” (insert joke here.)  We chose a delicious seafood meal at a Yunnan restaurant:

A price of 30 yuan is roughly $4.20 in US dollars.  The same meal would cost at least $20 in California (especially if you factor in tax and tip), and would not be nearly as tasty.  At the same food court, my wife saw this help wanted ad:

The first three lines are monthly salaries for restaurant workers at various skill levels, and the last one is the hourly wage for part-timers.  (One yuan is about 14 cents.)  Part-timers only earn about $2.50/hour in US dollar terms, but they can buy a nice lunch with about 1 1/2 hours of labor.  (The meat dishes were cheaper.)

My wife and I each paid $4.20 for a haircut in Beijing, and it was higher quality than the $20 cut I get in California.  You expect haircuts to be roughly equally affordable in each country, as the main cost is labor, and the technology for cutting hair is essentially the same in both places.  There’s also a roughly 5-1 difference in ride share prices, although in this case Uber is higher quality that China’s Didi.  Even so, the huge price advantage makes Didi far cheaper.

You’d expect China to lag behind the US in areas where there’s a great need for physical or human capital, or where that capital is employed less efficiently.  That makes it a bit of a puzzle as to why China is so poor.  It’s per capita GDP is $12,500, vs. $80,400 in the US.  Even in PPP terms it’s only about $23,300 (according to the IMF).  And yet China seems to have lots of capital:

1. It’s subways, intercity rail and airports seem far superior to those in the US.  And yet subway rides are only 28 cents, or roughly 56 cents for long rides.  A new York City subway costs $2.90, and seems like the Black Hole of Calcutta compared to the clean, safe, and efficient Chinese systems.  The roads are also in great shape, and they’ve built a vast expressway system.

2. China has an enormous capital stock in manufacturing, and produces lots of electric cars.  I was told a BYD electric car costs about $14,000—it would probably cost twice that in America (if we allowed it to be sold here.)

3. China has built such a large housing stock that many pundits claim that China has too much housing.  But in Beijing we saw an ad for a mediocre apartment of 1100 sq. feet that cost $2.2 million in US dollar terms.  Given the low Chinese wages, how are those housing prices reflective of too much housing?  More likely, the real problem is misallocation—too much housing in second and third tier cities, and not enough in the places where the Chinese most want to live (the biggest cities in the east.)

In America, we measure housing prices in terms of “rental equivalent”.  Here China looks better, as the monthly rents are nowhere near as astronomical as the price of buying a property.  Perhaps the very high price/rent ratios reflect a lack of good alternative investments for Chinese citizens?

Even after spending a few weeks traveling around China, it remains a bit of a mystery to me.  Not everything is cheap, even in the service sector.  Places like Starbucks charge US prices.  An ice cream cone might be 28 cents, and a few steps down the road it might be $2, even for roughly the same quality.  There seems to be a sizable subset of urban Chinese with western style incomes and lifestyles, and a service sector that provides them with expensive goods.  But working class Chinese can live very cheaply.

I didn’t see any homeless people in China, which might reflect several factors:

1. Lower income people in China are willing to live in very spartan and tightly packed conditions.  There might be 8 migrant workers in bunks in a single room. The poor in China don’t seem to worry as much about the poor people they live with being involved with alcohol, drugs, or crime.  That makes high density living easier.  A lot of California’s homelessness would go away if minimum wage workers could live together peacefully in college dorm level density.  A full time worker at a California McDonalds makes about $40,000.  Four of those workers would make $160,000/year.

2. Even so, you would still expect at least some homeless people living on the streets of cities as big as Beijing.  Perhaps the government doesn’t allow camping on the sidewalk, and removes the homeless to an out of sight location.

When you travel around Latin America, it feels like you are visiting a bunch of middle income countries.  China’s per capita GDP (PPP) is a bit below Mexico, but the country feels much different.  You see lots of things that make you wonder, “Why isn’t this a high income country?”  If they can build so much fantastic infrastructure so quickly, what’s stopping them from becoming high income?  Again, it may partly reflect misallocation of capital, especially from the large state-owned sector.

In almost every hotel we visited, the room service was delivered by robots (which is a really weird thing to see).  But you go outside and you see lots of zero marginal product workers aimlessly sweeping dust along in the street gutter.  Why?  (In Chile, I saw no robots and no ZMP workers.)

China seems like the classic glass half full/half empty situation.  Compared to the China of Mao Zedong, the glass is half full.  Compared to where China should be based on their talent for building great infrastructure quickly, the glass seems half empty.  More economic reforms?

PS.  To channel John Lennon, imagine there are no countries.  Chinese firms would build fantastic subway systems for places like NYC, very cheaply and very quickly.  We could pay for them by supply Chinese firms with all sorts of high tech goodies that we currently embargo.  Politics makes the world a poorer place.