Dr. Larry Hsien Ping Lang, Chair Professor of Finance of the Chinese University of Hong Kong, wrote an article about a bizarre phenomenon in China’s economy back in March 2011. Recently, it’s become a heated topic being circulated all over the Chinese social networks.
In the article The Shocking Secrets Behind the Low Wage and High Commodity Price in China, Lang points out that the biggest so-called miracle that came out of the Chinese economic reform is actually the high wage and low commodity price in Western countries, and the low wage yet high commodity price in China.
Lang points out a known phenomenon: an American blue-collar worker can support his family of four with one salary. In China, the blue-collar husband and wife can work day and night, but still barely be able to feed their one child. At times, they need support from their parents.
“We see an absurd phenomenon that leaves nothing but tears on the Chinese people’s faces: the more commodities China exports, the more foreign exchanges China makes, the more miserable the Chinese people are,” wrote Lang.
What’s to blame?
Why is the gap between American and Chinese workers’ wages shrinking, yet the ability of a Chinese worker to support his family is still decreasing?
Lang believes that the Chinese financial policies have resulted in the difference in the commodity prices in the U.S. and China. On one hand, Beijing issues subsidies through export tax rebates for the commodities and deficit subsidiaries for the export companies. This helps create a low commodity price in the U.S. On the other hand, high taxes and inflation in China result in high commodity prices in China.
Tax in China is as high as 64 percent of the commodity price, and the rest of the 36 percent is what the commodity actually costs. This means that for every 100 yuan a Chinese spends on a commodity, 64 yuan goes to tax. Such a high tax obviously raises the commodity’s price.
The Chinese people also have to pick up the tab of the enormous inflation caused by the export commodities.
Based on the exchange rate, Beijing has to issue about 7 yuan (US$1) for every one dollar of commodity exported. Currently, China has about $2.3 trillion in foreign exchange reserves, and as a result, over 16 trillion yuan is issued. All of this enormous amount of money debt from the export settlements is passed on to the Chinese people through inflation. As a result, the Chinese yuan depreciates and commodity prices shoot up.
Put simply, when U.S. dollars are used to buy commodities made in China, Beijing takes the dollars and the Chinese people get the depreciated yuan, and that is the only thing they get.
This is the secret behind the high wage, low commodity prices in Western countries, and the low wage, high commodity prices in China.