As Chengdu Living remains free, costs in the Sichuan capital continue to rise.
I remember when a big bowl of noodles was 2 yuan and taxi fares started at five. It doesn’t seem so long ago, but it’s been six years since Kung Pao Chicken (????) was 8 yuan or less. That was when the dollar to yuan ratio hung around 8:1 and teachers were strutting if they made more than 3,500 a month.
Well those were the good old days and they’re dead and gone, never to return. Prices are rising in Chengdu City and they’re rising fast. There are a whole basket full of reasons for inflation but they basically fall under one over-arching trend:
I know we’ve heard it for years – and we often scoffed or marveled, depending on the situation – but “development” was always a term that carried a bit of distance with it. China’s development. Chengdu’s development. Development of a middle class. It’s hard to actually experience something developing until its developed, and by then the frog is cooked, as they say. So when businesses suddenly raise the price of food, or a landlord calls up out of the blue with some bad news, ask not why the bell tolls for thee alone. It tolls for us all.
Local Businesses Feeling the Pinch
“Beef has gone up 8 yuan in the last 2 months,” said Tommy King of KC meats, a local meat supplier. “And it’s probably gone up about 50% in the last two years.”
KC meats has been in business for four years and since then the price for gas, electricity, and meats has risen each year. Tommy and his partner Sarah Crombie have been slowly increasing prices, but have not hiked them up as far as they perhaps should have gone, because customers may not be ready for the shock. KC Meats tries to run the business according to Western standards – cold, quality meats, refunds for unhappy customers – but their supply side is filled with unscrupulous and uncaring producers and deliverers who have no qualms about raising prices and laugh at the mention of a refund.
Other local businesses we all know are also taking hits. The Bookworm has been in business for almost six years, and has recently hired a manager, Andrew Barnett out of Manhattan NYC. But when Andrew re-shuffled the menu and raised prices in line with inflation to create margins that would allow for a profit, there was a bit of an outcry.
“There was an 8% rise in costs across the board from 2011 to 2012 for our business,” said Andrew. “Beef went up, water went up, electricity went up, bread went up …”
I admit it. I got irate when the Bookworm’s big breakfast and an American coffee put me back 75 yuan (about US $12). But that’s just the frog in the pot, realizing he’s being boiled. It might seem ludicrous to compare Chengdu to London, Paris or New York City, but Chengdu and other cities around China have costs that are on par with big cities across the world.
“I paid about 18 yuan for this grapefruit,” says Dana Kaufmann of The Lazy Pug. “We sell a glass for 25 yuan, so there’s not much room there for profit.”
A New Demographic
Another thing we’ve been hearing about for a long time is the increase in global multi-national corporations setting up operations in Chengdu. We published several articles on the Tianfu International Complex, and by reading them you get an idea of what it’s like being the slow-boiled frog. When a multi-national shows up, they bring their top management with them and the management brings their families. A typical top-level executive will have their rent paid for, along with their children’s tuition and perhaps a list of small amenities (travel, some food perhaps). But these expat packages are not drawn up with 2 yuan noodles in mind.
“People wanted me to create a taste of home,” said Andrew, of The Bookworm. “There are a lot of Chinese interpretations of what Western food is, but they all fall short and the main reason is cost. Cost is at the heart of authenticity; if you want a good cheesecake, you have to use real cream.”
The new wave of high-end expats is not only willing to spend 12 USD for a breakfast and a coffee, but the packages they ride in on are priced for 40,000 yuan for rent, 100k and up for school and another lump sum for all of the other things. What this does is drive up prices everywhere. International schools like Eton, Leman and kindergartens like Golden Apple adjust their prices to the new market. That adjustment sends a ripple across the economy that hikes wages for some and rents for others.
“Everybody wants a “fapiao” (state-issued receipt) these days,” said Tommy. “A fapiao increases my cost by 5-6%. Until now, I haven’t passed that on. But I might have to real soon.”
Inflation and the Dollar Peg
In an article on his blog, Patrick Chovanec talks about rising prices across China and lists a few interesting “amateur” surveys concluding that China is in some respects just as expensive as the US. He also draws a very easy to follow parallel between the RMB peg to the USD and inflation:
“…if a country is running a chronic imbalance of payments, you’re going to get adjustment, one way or another. If you allow the exchange rate to appreciate, the adjustment will come via external prices (exports become more expensive, imports become cheaper). If you accumulate foreign exchange (FX) reserves to keep the exchange rate from moving, and you don’t keep tightening to compensate, adjustment will come via internal prices (inflation). Either way, China becomes more expensive relative to the rest of the world.”
Basically China is stuck between a rock and a hard place. If the RMB peg is loosened, then exports grow more expensive and the entire economy receives a shock; if they keep the peg in place by buying foreign reserves and releasing RMB into the money supply, then the consumer is shocked by dramatic increases in the price of pork and flour. An article in the Expat Info Desk also talks about the rising costs around China and attributes some if it to weak Western currencies meeting a stronger Chinese yuan. But for the rest of us, it’s the grocery store price hikes we’re thinking about, not currency rates:
Lee Quane, Asian Regional Director at ECA International disclosed that their research indicated that the cost of everyday groceries had increased by 15 percent in China over the previous year and the cost of meat and fish had increased by 12 percent: “What we’ve seen in the last 12 months has been double digit inflation based on the items in our basket of goods. And that could be partly due to the impact of commodity prices over the course of the last 12 months finally coming through to what’s being sold on the retail shelves,” he said.
It seems that China would rather keep factories open and hope that wages can keep pace with inflation than risk having factories close en masse due to costs. What this means for us here in Chengdu is that prices will continue to rise as the consumer society continues to develop. In fact, Chengdu entered the Top 100 in Mercer’s annual Cost of Living Survey this year (!), along with other Chinese second tier cities Qingdao, Shenyang, Nanjing and Tianjin. Shanghai and Beijing are in the top 20, above New York City and London.
“The combination of increased prices on goods and a strengthening of the Chinese yuan has pushed Chinese cities up the ranking. Continued high demand for accommodation has also led to moderate increases in rental costs,” said Ms Nathalie Constantin-Métral, one of the survey’s editors.
Tighten Up or Move Out
Yup. The good old days are gone. But on a brighter note, I found myself way out on the west side of Chengdu this weekend and the good old days are alive and kicking out there. I ate a massive meal for 32 yuan and there was a teahouse serving 5 yuan cups of green tea. It looks to me as if the increases are in the wealthy districts of big cities, and not necessarily further outside of the urbanized centers.
Rents and transportation costs are surely lower out on the edge of the expanding city and (a scarier thought) meat and vegetables are cheaper too. In nearby satellites of Chengdu like Dujiangyan or Leshan, costs are lower still. It’s the high life that costs so much; the low life has seen only a gradual change. It’s just been swept outside of the city-center. This line of reasoning says that Dujiangyan is to Chengdu what Chengdu is to Shanghai. So if the prices are getting to you in the bustling center of China’s development, move out to the sticks, where there is still a bit of distance between you and the storm and the pot is still a comfy 35 degrees.