Six Degrees of Separation from a Chinese Reality in Cozy Waltham, MA

Balding's World

So today it came to my attention that the renowned Sinologist Scott Sumner has taken issue with my characterization of the Chinese economy.  To rebut my arguments, he uses such technical and economically robust analysis as “this is one of the most comical statements I have read in 3 years of blogging” and “Balding must live in some sort of cocoon”.  For those of you not versed in arcane language of academic economists, he is saying in the words of Dr. Van Nostrand that what I am saying is “kooky talk”.  Granted I have lived in China for three years and Prof. Sumner has lived in Waltham, Massachusetts for 30 years but what do I know.  However, while Prof. Sumner sounds like he had a wonderful two week vacation, a $2 bowl of noodles, and 50 cent ice cream cone, he remains wrong on all the fundamentals.  In the words of Prof. Mandelbaum, its go time.

The first issue I will address is that I inserted the wrong link into the 50% of Beijing apartments are empty.  That is my mistake and I take full responsibility.  However, and I cannot stress this enough, it is the wrong link not that the fact is wrong.  The Beijing government has admitted that about half of apartments have no utility hook ups and “netizens” as they are called in China in internet directed project estimated a 50% vacancy rateSome other reports, put the number at much higher than half.  In Shenzhen, where I live, a Shenzhen University project found the rate to be in excess of 40%.  This is the norm for most every big city and not because of one mistaken badly translated link.  One academic study found that nearly 30% of apartments registered no utility hookupFar from expanding, the population growth of Beijing is easing due to housing prices. Bottom line: the link I used was the wrong link, but the fundamental fact I was trying to make is still true and valid.  Though we we can argue over the exact number 40-50% of Beijing apartments are unoccupied, the problem is enormous.  What is that to you: a healthy housing market?  Strike 1 Prof. Sumner.

What really prompted me to respond to the profound economic insights leveled against me by Prof. Sumner is that I need to get out of my bubble in the “Chaoyang district of Beijing where all the foreigners live.”  Let’s ignore the fact that I don’t live in Beijing (Shenzhen), let’s ignore the fact that I don’t live in an expat area, and that I haven’t spent the last 30 years of my life in Waltham, Massachusetts then yes, I supposed you could say I live in a bubble.  But enough about me and my problems.

To test the rigorous analysis Prof. Sumner provided us with, I went to local grocery stores (notice the lack of foreigners) in my neighborhood while running an errand at the bank (again notice the lack of foreigners) before lunch (notice the theme of no foreigners) and compared prices between common household staples of the Chinese diet and other products with a grocery store in…..(wait for it)…..Waltham, Massachusetts.  If my contention that the price level in China is so much higher than other places, it should be easily testable.  Let’s find out if I am engaging in kooky talk.

Here is a brief description of the methodology.  First, I chose widely used, easily comparable products.  A white onion is easy to compare at the grocery store across countries.  Second, I chose products that are most common to the Chinese diet in which they should have the greatest price advantage Third, most products are unbranded in that they do not carry a recognizable brand which should add no price premium.  The table is below.

This rudimentary and short comparison of Chinese and American prices is enlightening.  What it tells us very simply is this: if you want to survive on rice and onions, you can do quite well in China.  If you want luxuries like meat, eggs, and milk, then China is very expensive place.  Lest I be accused of dramatizing this situation, there are literally riots in China over the price of pork.  The differences in this simple table would explode even further if we took into account relative incomes, housing prices, or luxuries like a car or coffee.  Car prices in China are frequently 50% higher than the United States.  Let me close this small exercise by noting that if you want to extend this exercise to tradable or branded products, I will be more than happy to oblige.  Strike 2 Prof. Sumner. It only goes downhill for Prof. Sumner from here.

Just to put this in one last bit of perspective.  The average price per square foot to buy an apartment in Beijing: $286.  Beijing per capita GDP: $5,181.The average price per square foot in Waltham, Massachusetts: $252.The median income of Waltham, Massachusetts: $65, 238.  Wait that simply can’t be right if China is so much cheaper.  The price per square foot is more in Beijing 13% higher but income is 93% lower!!  I live in China and not in a small New England college town(bubble), but darned if those numbers just don’t seem to add up.  Strike 3 Prof. Sumner.

To address the larger point Prof. Sumner is making, he says “But I suppose that’s also a “bubble” because it involves building, which is that awful “investment.”  I guess the investment-phobes want the Chinese to serve meals and cut hair out in the middle of the street, as they used to a few years ago.”

Once he phrases like that, yes, I am living and teaching in China because I do want the Chinese to return to the romantic times when people used to cut hair in the street.  Despite all evidence to the contrary, Prof. Sumner is saying as an economy, there is no bad investment in China, yes a couple deals might be bad but as an economy it is no problem.  Let’s leave aside what happened in Japan in the early 90’s Bangkok in the late 90’s, and the US in 2008 and turn to what this would imply.  Why don’t we build enormous $300 a square foot apartments in the middle of Africa?  People there need a place to live?  They are urbanizing?  They need investment.  It fits all his magic criteria.  I am not even going to address all the problems with this line of thinking.  Strike 4 Prof. Sumner.

Now if Prof. Sumner wants to make proclamations that the Chinese should enjoy their lot in life subsisting on the cheap rice and onions then let me be the first to invite him to subsist for a month on a diet of rice, onions, broth, and noodles.  That is what is cheap in China.  If Prof. Sumner wants to take me up on this challenge I would even allow the gracious New England Sinologist to use organic, free range broth, noodles, and vegetables from a local Boston Whole Foods.  Maybe a wager on the Chinese economy is in order if Prof. Sumner is so convinced about the goodness of all this investment?

Everyone in Asia knows that China is not a low cost producer.  Everyone in China knows that China is not a cheap place.  I guess there are some realities from New England college towns coupled with two week vacations that just don’t get through.

Maybe we could discuss over a bowl of $2 noodles.  I’d even be willing to buy.