Monday, July 10, 2006

A trip to China, part 3: the price of (everything but) tea

It's really interesting to walk around a Chinese city and look at how much things cost. I think you can learn a lot about the economics of various industries: how efficiently they deliver their products to the consumer, how much price competition there is, etc.

For example, take electronics. Check out the back of your computer, your iPod, your DVD player, and chances are it is made in China. Logically, then, prices should be lower here where it is made, now that they are widely available here without restriction. But that's not the case. For example, cheap Chinese-brand DVD players (which quite possibly have internals that are also used in Japanese-brand ones, but which definitely are less sturdily made) start off at around US$30 or so: the same as low-end DVD players in the US. And that's after all of the cost getting the product to the US and the markups made by importers and retailers. My guess is, like clothing manufacturers, the electronics manufacturers here don't make much money selling overseas, instead relying on a home market to make their profit.

[As an aside, it's amazing the variety of products that don't reach the US. Many (like iPod lookalikes) probably never get out of China. The other interesting thing is the products you can't get in China. Most people don't have carpets, yet simple stick vacuum cleaners are nonexistent and little motorized brush sweepers made by Philips sell for almost US$100. And don't bother looking for a VCR; most people here won't know what you're talking about, or will point you to a mini-DV camcorder.]

The other major commodity that springs to mind as being comparable in price to the US is real estate. Actually, recent construction in Chinese metropolitan areas is more expensive than in the US. On the one hand, this might not be surprising, given China's population and economic growth rate. But then there's the other hand.

First off, even middle-class urban dwellers here earn much less than their US counterparts, and so logically shouldn't be able to afford homes as expensive as Americans (many of whom can't afford to buy real estate at curent US prices with rising interest rates). They also represent a tiny fraction of the Chinese population, so the actual number of potential buyers is probably smaller than in the US.

A second driver of high real estate prices are investors, many from overseas. In fact, many of the surburban housing developments are only about 50% occupied, despite the fact that they are 100% sold. Half the homes are purchased purely for capital gains, not even rental income. Further signs of this foreign investment are the Canadian schools near or in the developments.

So, does this amount to a bubble or is it merely a vote of confidence in the Chinese economy? I don't know, but it isn't a good thing that most Chinese professionals are priced out of the market.

No comments:

Post a Comment