2010-07-13

Chinese currency reform continues; why Chinese consumption is low

China Boosts Yuan Services for Taiwan
The People's Bank of China said Tuesday that it had authorized BOC Hong Kong (Holdings) Ltd., the Hong Kong unit of state-controlled Bank of China Ltd., to offer yuan cash settlement services to Taiwan banks. BOC Hong Kong already supplies yuan banknotes and related exchange and repatriation services to banks in Hong Kong.

Products made in China often cost more there than in the West
The only difference — besides a manual written in Chinese — was the price. Luo paid $2,760. That's about $460, or 20%, more than an American buyer would spend at an Apple store or buying it online.

"It's a huge expense, but what can I do?" said Luo, a 24-year-old professional photographer who wears glasses with Buddy Holly frames.

The premium prices aren't limited to foreign-branded computers. Kobe Bryant's Nike sneakers with the Made in China label go for $165 in the U.S. But at an official Nike store in China? $190. A flat-screen Sony TV assembled by Chinese laborers runs about $800 at a Best Buy store in the U.S. But you'd pay 30% more at the popular Chinese appliance chain Gome. The same goes for that Maclaren Techno XT infant stroller. It's also manufactured here, but you'll typically pay 40% more for one at a Beijing mall than you would in the U.S.

It's a paradox of life here in the world's factory floor. The place known for delivering low-cost goods to Western consumers doesn't always do the same for its own people.

This may have been of little consequence to economists and world leaders a few years ago. But today, getting China's consumers to open their wallets is crucial to balancing a wobbly global economy grown too dependent on American and European shoppers.

It won't be easy. Chinese households are already famously frugal — and with good reason. A flimsy social safety net means tens of millions must save for their own education, healthcare and retirement. And while consumer spending has been rising along with China's prosperity, it has done so almost in spite of an economic model geared almost exclusively toward production rather than domestic consumption.
The social net reasoning is total bunk. It's just taking Peter's savings to pay for Paul's stuff, but its a popular story for economic illiterates and socialists. Next we get the real reasons:
For example, U.S. manufacturers have long complained that the Chinese government keeps the value of its currency, the yuan, artificially low. That has boosted China's exports by making its goods cheap for foreigners to buy. But it also makes imported products expensive for Chinese consumers.

Then there are taxes and levies. That Apple laptop is made at a factory that's granted a rebate on China's 17% value added tax, as long as those computers are exported and sold abroad. Chinese buyers aren't so fortunate. Before that same machine can be sold domestically, it is first sent to Hong Kong, a special administrative region of China, then returned to the mainland with a 20% import tariff, industry experts said.

The price penalty is frustrating to savvy Chinese consumers who know what things cost elsewhere thanks to the Internet and their own shopping trips abroad.

"When I saw the prices at an outlet mall in New York, I thought it was crazy how much we were paying in China," said Joanna Tong, 22, a Beijing native who has vacationed in the U.S. "It's not fair. Now that I know the prices in the U.S., I've been reluctant to shop here at all."
Not one mention of tax reform in the article. It's happening, slowly, and it will benefit consumption.

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