Thursday, July 14, 2011

The real cost of living in Shanghai

One of the problems in comparing the cost of living in different countries is that even if exchange rates are not manipulated, exchange rate equilibrium between two countries represents only tradable assets, which are in theory subject to arbitrage. Thus, in the long run the price of an iPhone purchased without a contract in the US with US dollars and an identical iPhone purchased in China with Yuan should differ only based on value added and other taxes and transportation costs. Otherwise, cheaper iPhones in the US will be purchased and shipped to China, bringing the two markets into equilibrium (something which Apple tries to prevent of course).

The problem is that most goods and services are not tradable. While in theory a big mac should cost the same in both places, one cannot buy cheaper big macs in Portland and resell them in Shanghai. The same with Starbucks lattes, which are also used for a tongue-in-cheek price index. Similarly, real estate, haircuts, and karaoke. So what is the real cost of living in Shanghai?

The official figures are based on comparable market baskets of goods and services, in the same way as the consumer price index. The problem is, a middle class resident of the US will have a different mix of goods and services than his/her counterpart in Shanghai. What Shanghai market basket should be used to compare price levels?

An identical top-end global lifestyle costs about the same, perhaps more in Shanghai because of value added taxes and inflated real estate prices. If you buy premium western brands, eat western food, eat in western restaurants and bars, drink French wine, drive a German car, and own a condo in a fashionable neighborhood, your cost of living in Shanghai will be about the same as in New York.

If you live an upper middle class westernized lifestyle but adjust for local products and food, Shanghai is cheaper. But how much? Many Chinese argue that the cost of living in Beijing or Shanghai is about 1/6 that of the US, but that is probably due to confusing purchase power parity with currency exchange rates. Based on salary levels and equivalent market baskets, 1/3 might be more accurate. The International Monetary Fund estimate is that in terms of purchasing power parity, one US dollar is worth 3.8 Yuan, which would make the cost of living here somewhat more than half the US level. My personal estimate is that for a childless Chinese-speaking couple who rent and have no car, the cost of living in Shanghai is about half what it is in Portland for an equivalent lifestyle. If it weren’t for rent (which is about half the cost of a Portland equivalent and dominates the market basket due to the amount), the Shanghai cost would be closer to 33% of the Portland cost.

Food is much cheaper (if you don’t buy too many imported products), clothing is about half if you buy (and can fit into) Asian brands, medical costs are much lower, public transportation is much lower, but cars, and real estate are much higher. Cell phone usage is much cheaper; the phones themselves are much cheaper for low-end models and more expensive for top-of-the-line models (with plenty of people willing to pay a substantial premium for an iPhone or a Galaxy S). Rent in Shanghai is about half what it would be in Portland (and thus probably a quarter of the non-rent-controlled price for NYC). Chinese restaurants are quite cheap, but eating out in Western style restaurants is more expensive for what you get. Imported wines are very expensive; domestic wines and beer are cheap.

There are confounding issues. One is family costs. Chinese families need to pay for children’s educational expenses, and to support their parents. American families (at least among our friends) are much more likely not to have children, and are not expected to support their parents. On the other hand, US taxes are much higher than Chinese ones. Finally, there is the issue of face and conspicuous consumption – living below your means (at least in public) is just not done here.

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