April's talk on Chinese economy (All rights reserved)

It’s been two days in Shanghai. I visited Renmin Square, Nanjing Road, and the Bund Center in Shanghai and West Lake in Hang Zhou. So far, I have chatted with cab drivers, shopping center salespeople, and shoppers and gathered some really interesting facts.

1.       1. Real Estate:
Both cities’ real estates are booming. The housing prices in city centers are around 40,000 to 50,000 RMB per square meter, which is equivalent to 670 to 835 USD per square foot (40,000/6.65/9 to 7,500/6.65/9). That is, a 900 square foot co-op in any skyrocket apartment building is around 603,000 to 750,000 USD. Notice it is co-op, not condo or house. This sounds ridiculous to me because the median income is around 120,000 to 150,000 RMB, which is about 25,000 USD. That being said, a typical resident needs to work 28 years for an apartment (700,000/25,000). Housing prices half an hour away from the city centers are about 3/4^th as much, which does not make a huge difference. What is more disappointing is that most people who are purchasing houses are taking loan size of 50-70% at an interest rate higher than Chinese inflation rate of 5.9% as reported by Chinese government. This allows the 70% mortgage financed homeowners to be underwater if housing prices decline by less than 25% depending on their credit. Although the government has imposed 50% minimum for house financing last month, some house buyers are taking private loans from relatives and friends to pay the down payment. Therefore, the government’s action to slowdown economic growth might not be as effective as it seems.
2.       2. Level of consumer spending:
It comes as a shock to me how much more expensive the same items are in China than in U.S. and how many people are buying these items just because they are branded. For example, Zara was surprisingly popular in both cities. Jeans, long-sleeve sweatshirts, and sweaters made of cotton and polyesters are selling at 299 RMB or 45 USD, compared to similar items selling at around 25 to 35 USD in Boston and New York City.  Moreover, a pair of typical* Nine West boots is selling at around 2200 RMB or 340 USD; a typical Coach purse is selling at 4500 RMB or 670 USD; Lamcome lip gross at 350 RMB or 53 USD; a Vero Moda leather jacket is selling for 2300 RMB or 345 USD.
These prices partially reflect Chinese taxation on “imported goods” that all have prints “made in China,” and partially reflect the level of consumer spending. On the other hand, in Shanghai, every two out of ten girls have a pair of Ugg boots on, every one out of fifteen girls have a Louis Vuitton purse, and every seven out of ten girls have branded purses, shoes, or coats.
Louis Vuitton and Gucci salespeople claim that daily sales volumes are “very impressive.” Some stores claim that the brands they are carrying are U.S based brands, such as E-Land and Plory, which are unheard of in U.S, but the items are just as dear.
It’s apparent that Chinese shopping pattern is similar to that of South Korea, pursuing brands blindly just for the sake of competing with friends to see who has got the most popular item.
3.       3. Where is the wealth from?
A lot of shoppers are feeling wealthy because of the booming real estate which brought them immediately realized wealth when the real estate developers generously compensate old house owners for kicking them out of their old homes and building taller buildings at the same spots. Some shoppers are feeling wealthy because they are upstarts, who used to earn fixed salaries working as government officers for running state-owned businesses, and suddenly became wealthy when these businesses are privatized and they became the business owners by using the assets of the businesses to take loans and leverage buyout the businesses. Since the businesses are originally state-owned, a lot of them are monopolies or local monopolies. Therefore, the profitability and economics of scale is unquestionable. In other words, the business owners’ wealth all came so easily that they wouldn’t feel as hurt when the wealth fades away as they are buying Omega watches for their secretaries and secondary significant others.

*”Typical” means median.