Stronger Currency Boosts Chinese Purchasing Power
Fred
Gale and Francis
Tuan
When converted to U.S. dollars
at current exchange rates, Chinese retail food prices
are about a fourth of the level of U.S. food prices.
Prices of vegetables, which constitute a major portion
of most Chinese meals, are as low as a tenth of
U.S. prices. The average per capita urban household
income in China—when converted to dollars
at the official exchange rate—was about $1,600
per year in 2006. With low domestic prices, Chinese
consumers can maintain a comfortable lifestyle on
seemingly meager incomes—as long as they consume
domestic foods.
Imported fruits, for example,
are usually eaten only on special occasions or given
as gifts in China. U.S. apples are considered a
luxury item because they cost several times as much
as Chinese apples. Cheaper domestic apples are purchased
for everyday consumption.
Since the incomes of Chinese consumers
have little purchasing power on world markets, China
does not import much food. China’s imports
have boomed for soybeans, cotton, and vegetable
oil, but prices of most imported agricultural commodities
are too high to make major inroads in the Chinese
market. It has been estimated that less than 5 percent
of items in Chinese supermarkets are imported.
Appreciation of the Chinese exchange
rate may make imports more affordable for Chinese
consumers. After remaining fixed at about 8.3 yuan
to the U.S. dollar for a decade, the Chinese yuan
has been allowed to appreciate gradually since July
2005. With an ongoing trade surplus, rising foreign
exchange reserves, and continuing pressure from
trade partners, further appreciation of the yuan
is expected.
Normally, a stronger yuan would
make imports more attractive to Chinese buyers,
but a surge in world prices and record-high ocean
shipping rates have kept imports of most grains
and meats from being price competitive in China
despite the modest currency appreciation. A much
larger currency appreciation would be needed to
make imports of vegetables, fruits, and processed
foods price competitive. These products have especially
low prices in China.
Price inflation in China could
improve the price competitiveness of imports without
an appreciation in the exchange rate, but China
has experienced only moderate, intermittent ups
and downs in food prices since the late 1990s. A
sharp increase in pork prices in China during 2007
led to a Chinese commitment to import U.S. pork
during 2007-08. However, the rise in Chinese pork
prices was more a reflection of cyclical forces
in the hog sector rather than an indicator of broad-based
inflation. Chinese hog prices began falling in August
2007, as a major disease outbreak was brought under
control and farmers expanded hog inventories in
response to record-high prices and government subsidies
for breeding sows. Chinese corn and oilseed prices
surged in 2006 and 2007, but those increases also
appear to reflect world market conditions rather
than Chinese inflation.
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