Friday, April 18, 2014
Cheap restaurant meals conceal expensive realities
Global Times | August 21, 2011 19:43
By John Gong
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The biggest news so far about US Vice President Joe Biden's China trip turned out to be his $12 lunch bill for a party of five at a touristy restaurant in Beijing. Biden chose to have his first lunch in Beijing last Thursday at Yao's restaurant near Drum Tower, a popular tourist spot where the former residence palace of a Qing Dynasty (1644-1911) royal member is located.

Here is what Biden, Gary Locke and his wife, Mona, Biden's daughter-in-law and his granddaughter ordered with 12 bucks: five bowls of old-Beijing-style soy-paste noodles, 10 steamed meat buns, three cold dishes including smashed cucumber salad, mountain yam salad, potato threads with green pepper, and two glasses of Coca-Cola.

Sounds like things are cheap in China, right? But Biden's lunch was actually an exception.

China used to be the low cost paradise for multinational companies, having won the name of the world's manufacturing factory. But things have changed greatly over the years, as the yuan appreciated and the domestic wage levels climbed.

Today the low cost manufacturing value proposition is all but a myth, and if this trend continues, before long the country will soon wake up to see that it doesn't have much a competitive advantage anymore in world markets.

There hasn't been a formal scholarly study that compares price levels in the US and China. But anecdotal evidence abounds that most things in daily life in China are actually more expensive than in the US. Even for the same products manufactured in China, those exported to the US after crossing the Pacific still see much lower prices.

Here are some of the rules I have come up with regarding higher prices in China.

In general, markets with heavy State-owned enterprises dominate see higher prices. The prime example is gasoline, whose market is dominated by the duopoly of the two obscenely profitable State-owned oil companies.

In the US, the price at the pump is about $3.50 a gallon, which translates into 5.9 yuan a liter. The price in the US also includes taxes and fees that go to the Department of Transportation for financing highway maintenance and new build-outs. This eliminates the need for most highway tolls. But in Beijing, we pay 7.5 yuan a liter, but also have the world's most expensive highway toll rates.

This leads to the second rule, which is that anything that has a high transportation component in the cost structure becomes expensive.

Examples are chemical products, for which China is a big importer. Shipping a container from the southern city of Guangdong to Northern China is sometimes more expensive than sending  to Long Beach, California. Shipping it to Long Beach and then back to say, Tianjin, can even be cheaper. Freight companies sometimes charge very low prices for returning containers from the US, as many of them are empty due to the trade surplus.

And anything that has a long value chain in production is typically expensive. This has to do with China's 17 percent value-added taxes, which constitute the largest source of tax revenue.

Automobiles, for example, are typically more expensive in China than in the US. I used to drive a Chevy Malibu that I bought for less than $14,000 six years ago in the US. Shanghai GM will soon roll out the latest version of Chevy Malibu, which is expected to be in the 200,000 ($31,473) yuan range. On average, almost half of the price a consumer pays for a new car goes to the government.

Items that critically rely on distribution and retail channels are typically more expensive in China. I hope the US embassy will arrange for Biden to spend some time at a Beijing mall. My bet is that he would wait until getting back to Washington to shop, even for the same made-in China stuff.

Mom-and-pop restaurants that have a thin value chain in delivering end products can be cheap. Barring that, the world should not be fooled into thinking  that things are cheap in China. Bargains are increasingly rare to find, and the country will have to find other ways to be competitive than just low costs and low prices.

The author is an associate professor at the Beijing-based University of International Business and Economics.

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