Income and Buying Power

In this week I like to write about the buying power and income of the Chinese people. Many of my Chinese friends and subordinates believe the cost of living in China is lower compared to the developed countries. Almost every Chinese who have travelled abroad to Europe and USA would attest to me that things are expensive there. Not only have they compared the price of merchandized goods but also salaries and service charges. They felt that westerners are reaping off their low labor cost and resources.

They are right if they compare the cost in terms of dollar value at respective exchange rate. But if you use the buying power with regards to one income, a different scenario appears. The table below depicts the estimated average basic monthly income in China, Singapore and USA. The income is gross salary before tax and does not include bonus, social benefits, insurance, overtime, pension & provident fund, etc.

Job                                                                         China                     Singapore            USA

Production operator                                       RMB 1,000           S$1,200                 US$1,200

Fresh graduate engineer                              RMB 2,200           S$2,200                 US$2,300

Section Manager/Supervisor                      RMB 5,000           S$5,000                 US$5,000

Senior Manager                                                                >RMB 10,000      >S$8,000              >US$8,000

You can see that in terms of numerical figures, the salaries in these 3 countries are about the same for similar job and position. The following table compares the cost of goods sold and services in these countries.

Goods & Services                                             China                     Singapore            USA

Average fare for subway                              RMB4.00              S$1.30                   Not applicable

Average fare for taxis (5Km in city)          RMB15.00            S$5.00                   Not applicable

Big MAC set meal at McDonald                  RMB23.00            S$7.05                   US$4.99

Meal for 4 at average restaurant               RMB250.00         S$60.00                 US$80.00

Normal T-shirt                                                   RMB40                  S$8.00                   US$9.00

Toyota Corolla (1.6L)                                       RMB 115,000      S$72,000              US$16,750

Housing for average family                          RMB 900,000      S$300,000            US$200,000

From the above table, it is apparent that the buying power of a Chinese is far less than his counterparts in Singapore and USA. The expenses are definitely higher to the Chinese. For every trip he bring his child to McDonald for a Big MAC set meal, the Singaporean and American can bring his child 3 and 4 times respectively.  That is why you seldom find an operator bringing his child to McDonald.

The operator has a lower standard of living compared to his compatriots and overseas counterparts. He buys less and spends more on education and medical fees than the workers in other countries. Hence a decent meal or a nice dress may seem cheap to us, but it is a big dollar item for these folks. Families with more than one income earner are better off and help to alleviate the pathetic stage.

When it comes to cars and housing, the variance is even larger. It is very difficult for an average income family in China to have the same living standards as in Singapore and USA. The Chinese have to exceed the middle income level in order to afford a modest sedan car; while in USA, almost every working personnel is driving his or her car. Would an American buy a Toyota Corolla at US$115,000?

The ratio of housing cost verses an average annual salary is probably the highest in the world. You can get a house with a small garden at US$200,000 in USA but a RMB 900,000 could only get you a 1,300 square foot unfurnished apartment in outer urban cities. And yet the quality of housing is less off than the comparable standards in Singapore and USA. And this is probably why the Chinese is so fascinated about living in USA!

The expatriates are being paid in their home currency plus the living allowance with fringe benefits. Hence an American enjoys 6.8 (current exchange rate) times the buying power of his local peers. Life is good here for the expatriates and they can afford to spend lavishly and live like a king. I too enjoy greatly my lifestyle in China with all these “cheap” expenses around me.

The starting salary of the operators increases very little for the last 10 years except for Guangzhou province in South China where it encounters acute labor shortage. There is abundance of labor from the farmland to fill up the vacancies at the same starting salary every year. This has created a unique economic factor in China where she does not face the inflationary wages of the production operators found in other countries and thus continue to be a low cost manufacturing base for the world.

I like to cite an example from a renowned economist on his TV show about the ex-factory price of a popular doll at US$1 while it is selling at US$9.99 at a mega store in USA. And this price has been the same for some years! This is a good quality doll and not the infamous kind you learn from your TV. You can now understand why companies and factories are rushing in to buy from China.

Entry level on basic salary for middle level management has not increased much too due to the large pool of junior staffs eager to move up. However for the middle managers in the foreign companies and factories, the annual increment (12~20%) is high and also above the national average wage increase of 8% due to the work experience gained and linguistic ability.

The turnover rate of these managers is also high as the new foreign companies are willing to pay higher salary to lure them in to shorten the startup operation. And at the same time, many of the foreign companies could not wait to replace their expatriate staffs with the locals to reduce the high cost of maintaining the expatriates and their families in China.

Besides the salary increase, these local managers also enjoy the best opportunity for promotion. Many graduates find themselves in a senior management position in less than 10 years from his first employment. This is half of what his counterparts take in other countries. The hasty promotion has caused some of these managers lacking the maturity, sophistication and in-depth knowledge and experience compared to their overseas counterparts.

The middle class is catching up to match the lifestyles of the developed country with their huge increase in salary. It is this fast growing group that gives China a huge consumer market. The production workers are left behind. Fortunately the inflation is relatively low so the production operators could continue to feed themselves in their old homes or dormitories. Housing, education and medical cost are skyrocketing and out of reach to lower income group. Even the middle income group is keeping a large portion of their income in saving for future needs and emergency.

The fortunate ones are the successful entrepreneurs, senior executives of the big state owned enterprises and Fortune 500 multi-national companies and some government officials who have enriched themselves unethically and illegally. There are many tycoons who make their first billion in less than 10 years. Some senior executives are having remuneration package close to what their peers in overseas corporate headquarters are getting.

The income of this group has propelled many of them to the super rich class. This is a wholly awesome spender who does not wink an eye when buying expensive cars, bungalows and luxury items. Some lavish dinner could cost more than RMB 60,000 for a table of 10 persons or less. China has more high end Mercedes-Benzes cars than any other countries. The market for luxury items is growing rapidly and amazes the outside world. This contrasts sharply against their compatriots working on the production floor assembling the US$1 doll.

And this is the kaleidoscope of China.

   Posted on 31 Aug 2009
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