An article in Caixin Magazine, lately, presented figures and purported to use purchasing power parity (PPP) to show that the Chinese Yuan (RMB; Renmin Bi = the people's coin) was actually overvalued, not undervalued as the rest of the world seems to think.  If we take a closer look at their argument, we can see that it is more like lying with numbers or a variation on the index game played by brokers and fund managers.

In the article, the author uses BMW and Ben and Jerry's ice cream, as comparable items for looking at purchasing power parity value of the Yuan.  The concept of purchasing power parity argues that if I can buy a pound of potatoes for USD1 and walk across the border to Canada and buy a pound for CAD1.25, then, the proper exchange rate should be CAD1.25/USD.  For a better calculation, one should include all goods and services that could flow across the border.  Otherwise, there is an arbitrage, and arbitrageurs would take advantage of it.  Indeed, that is exactly what has been going on in the Chinese export market, for many years:  it was driven by PPP arbitrage [see some of our other articles: PPP Aritrage and You're Missing the Point, on our In Country China Page ]. 

The trick that the author of the Caixin article used was to use goods that need to be imported and carry import fees.  Even MacDonald's and Starbucks, operating in China, enjoy the benefits of the export arbitrage effect, as they pay international prices for raw materials and local prices for labor, rent and power, and charge higher than local prices.  A mocha cafe costs around Y30, give or take, which is around $4-5, which is probably comparable to prices in the US.  A double dip of ice cream at Hagen Das costs about Y50, equals about $7-8, but at the newer, more local additions to the China ice cream shop scene, a double dip is about half the price, and a local homemade gelati place used to charge Y8, a little over $1.  One can find many similar examples of foreign companies or companies of foreign-type products taking advantage of the disparity of the Yuan.

Let us look at some other examples, which are part of my everyday experience.  I can buy a local lunch, in Guangzhou, for around Y5, which is less than US$1, but it costs me 6 lunches to buy a 1/2 liter bottle of Listerine.  Moreover, in the US, I could buy the one-gallon bottle of Listerine made for Walmart for under US$5, which is what it would cost me for lunch at MacDonald's, in the US.  I rent a loft space in Guangzhou, a a major modern Chinese city, which had China's largest building, the Baiyun Hotel, in the late 1970's, and which has a current population of about 10 million.  The space is in an exclusive part of town, Dong Shan Kou, and is around 1500 square feet; rent is Y6,000/month, less than US$1,000.  I rented a similar loft space in NYC, in the late 1980's, only half the size of this, for US$1,500.  I rented an apartment in NYC ten years ago, one-third the size, for US$3,000/month.  I can buy a pound of homemade Chinese egg noodles for about Y4, but, if I want to buy Barilla, it costs about 3-5 times as much.  At an Italian Restaurant/cooking scool, in my neighborhood, a pound of homemade pasta is over Y100, which is a price that some nouveau riche Chinese might pay to impress their friends, but is otherwise completely crazy.  When I first came here, six years ago, I needed a replacement battery for my Gateway Computer, and no one but Gateway made the battery.  By the time it got here with shipping and import fees, it cost me US$300, over Y2,000.  That was the last time I bought something from outside of China.

Indeed, we could have even more fun by using by taking things like Converse Chuck Taylor high-top sneakers.  You can buy fake ones [they swear they are genuine] for Y50 or for Y200: take your pick, they both last about one month.  Are thyere real ones?  Who knows, but I gave up after those two pairs.  I now buy imported shoes from reputable stores, and I pay about double the price that I would pay for the same shoes, in the U.S.  However, I get the quality of the brand, and they last several years of constant use.  I can buy Cocacola's locally-made Minute Maid orange juice for anywhere between Y3 and Y10, depending on the store.  Marlboro cigarettes, in my neighborhood, are priced at Y6, Y9, Y10, Y15, or Y20.  Part of the differential is country of origin; part is whether or not the tax stamps are real; and part is whether they are fake [it's easy to copy a package] or real, if any are real.  We could then base PPP on whichever priced Marlboro we want, depending on what we want to "show".

The real point about PPP and the Chinese Yuan is that you have a choice: use the fact that the Yuan is actually drastically undervalued, or be stupid and showy and buy Hagen Das, whose local advertising is...if you really love me you'll buy Hagen Das for me [sucker].

A link to the Caixin article is http://english.caing.com/2010-11-16/100199156.html  .

© Craig Mattoli, Red Hill Capital, Delaware, USA; Leona Craig Art, Guangzhou, China. All worldwide rights reserved.