Misconception: Prices in China Are Higher than in America or Europe

Are prices in China higher than in America or Europe? In the case of some consumer goods this is true, but overall, this is totally false. How could this mistake happen? It’s all because of erroneous comparisons.

Skewed sampling is the primary factor leading to this misconception. One should compare prices of typical goods and services bought by a majority of middle class and lower class people, not prices of goods and services bought by a small population of rich people. Per capita income and wealth naturally tend to split in a market economy, which means that the goods and services bought by different classes of people are very different. The economic system as well as a recent opening of economies and markets makes this difference even more apparent in developing countries.

Most traditionally socialist Western countries implemented income distribution measures after the Second World War. This alleviated the degree to which income and wealth polarized. In contrast, many developing countries lacked a powerful government or did not fully implement a market economy. Thus, income and wealth diverged to an astonishing degree, which increased the difference in consumption patterns among differing classes.

This can be clearly seen in China after implementation of reforms, as well as in the former Soviet Union and Eastern Europe after the collapse of the Soviet Union. At the same time, as economic systems opened, many developing countries did not have policies that motivated companies to develop the quality of national products.

Naturally, consumers in developing countries coveted products made by developed countries or at least their brand names. Thus, counterfeit versions of famous Western brands became popular. Brands that are considered to be ordinary in the West are considered to be high quality in developing countries; product sales make this point quite clear. The prices of those goods are always inflated, so middle and lower class consumers who have to save money will mostly buy or only buy national brands. High income consumers, however, will choose expensive Western brands.

The consumption patterns of high income consumers in developing countries is very similar to the consumption patterns of consumers in developed countries, whereas the consumption patterns of different groups within developing countries is becoming more and more different. This is because developing countries have a closed economy.

In this way, using the consumption patterns of the upper classes as a benchmark for prices in a country misrepresents the facts. If we look at a luxury good like a French “Pierre Cardin” shirt, or a high quality American windbreaker, and check its prices in Beijing’s Scitech Plaza (a luxury shopping center) or in Thailand’s tourist areas, we can come to the conclusion that prices are higher in China than in America and Europe. However, in these places, the prices of goods do not represent the average price of goods in that country.

Another error leading to the misconception is comparisons made during different sales periods, such as during a sale or when products were being sold at full price. The sales cycle of fashionable goods such as clothing, leather and electronics can be divided into three periods: first hitting the market, becoming popular, and becoming less popular.

The same good will have a much lower price when it is becoming less popular than when it is first hitting the market and when it is very popular. This is especially true for high quality goods. When they first hit the market, new goods are sold in the best shopping malls. Less popular goods will be sold in surplus stores or clearance stores. The higher quality the brand is, and the more fashionable or special the product is, the bigger the changes in price depending on the timing of the sales cycle. Therefore, it is important to use statistics from the same sales period and the same kind of shopping location when comparing prices regionally and internationally.

It is easy for such mistaken comparisons to be made because any particular sales period in Europe and America comes earlier than in China, even for the same good. Middle level and high quality Western brands are always considered high quality brands in China, which is mostly due to consumers in developing countries blindly pursuing brands and fashions from developed countries.

Today, China has already eliminated the constraint of the foreign exchange gap, so, if some consumers decide to buy foreign brands it’s not the end of the world. China’s cash flow is balanced, so it can be lenient towards this blind pursuit of foreign brands.

This kind of blind pursuit cannot be completely eliminated as long as China has not fully caught up with the West. However China’s trade policies should not aim to satisfy the needs of foreign fashion products. Our trade policy should always focus on the development of national industry.