Is China Getting Too Expensive for Foreigners?

Wednesday, April 28, 2010 2:59
Posted in category Uncategorized

Following up on the post I wrote earlier in the week about whether or not China was getting too competitive or expensive for foreign firms in China, I thought it would be appropriate to also address another topic of conversation that I have been having a lot lately.  Things are getting expensive, and that rising cost of living may has reached a point where some people I know are beginning to plan their exit from China.

That, while there are certainly compelling economic and professional reasons for staying in China, other factors are now being considered.

To be clear, a lot of the conversations I have regarding China’s costs often are driving in a manner that some would say is superficial.  That the costs of the average Western lunch are now twice as expensive as they once were, and that at that cost level, you could be eating a whole lot better in the US or Europe as the basic ingredients and service quality would be at a higher level.

At a higher level though, the fact that a 1200 sq ft apartment can cost over a million USD now in downtown Shanghai is a consideration, especially considering the fact that back in the States one can now find houses that are larger in size with a front/ back yard for significantly less.

… and then you have the costs of education.  Want to send your kid to kindergarten in China?  Be prepared to pay 15,000USD and up for a school that offers the Western equivalent, or make the choice and go local.  Another compelling reason for many new families to begin planning their exit.

Especially given the fact that many expat jobs, which used to pay for housing and education, no longer do.  That, with the recession and improving quality of labor capacity, many firms are now downsizing their expat packages and forcing managers to now flip the entire bill themselves.

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14 Responses to “Is China Getting Too Expensive for Foreigners?”

  1. Craig says:

    April 28th, 2010 at 5:11 am

    Shanghai is not China! Plenty of space left in China’s booming second-tier cities, like Ningbo. The air is better, the people are kinder, the rent is cheaper and the crime is almost nonexistent.

  2. Amanda Chen says:

    April 28th, 2010 at 5:28 am

    It is true to spend more money to live in China.However,it is very important to learn how to bargain with saller in China culture,or you may spend unnecessary money.

  3. Bill Dodson says:

    April 28th, 2010 at 5:52 am

    We Western expats in Suzhou have been having the same conversations. Amazing the rate of inflation for, as you say, so-so service and ingredients, preparation and the like. Boy, am I glad I like noodles!

  4. Rich says:

    April 28th, 2010 at 10:05 am

    HI Craig.

    On one level I would agree with you, but on the other level… while you are right about the cost factor (Ningbo being cheaper than Shanghai).. I don’t know many who would choose Ningbo over Denver when looking at lifestyle.

    Company wise. That may be different, but again, I think executives are choosing to return to home markets for ease as well. That, while you can certainly capture immediate economic costs in a move to the 2nd/3rd/4th tier… there is the mental costs of setup to account for…. and the risk that once stabilized, the process will have to be repeated.

    again.. not saying the are right, but I can see it now more than I could 5 years ago.

  5. Rich says:

    April 28th, 2010 at 10:06 am

    Amanda

    bargaining is something that is a must do… but it is something that gets old…

  6. Rich says:

    April 28th, 2010 at 10:08 am

    Bill

    I like noodles too, but I ration. After all, just like Milk power… white flour can be adulterated as well.

    Sorry.. I have spent a lot of time on food issues, and that for me is becoming THE issue I am concerned with more than any other. In Shanghai, I have the O farms worked out and can get stuff. Suzhou… I bet there is a market there as well!

    R

  7. Chris says:

    April 28th, 2010 at 9:15 pm

    I have mixed feelings on this one. As a ‘half pat’ – an overall non-salary allowance that covers modest housing & education expenses – China is feeling somewhat expensive. Housing no longer cheap, however, there is choice and even in Shanghai great apartments available for reasonable prices. The cost of purchase extraordinary though and my lardlord must get a return of around 1% on the value of the property after tax and expenses. No wonder he’s in the process of selling. Schooling is also getting quite expensive but there is also a certain level of choice there as well. Some good schools available that do not charge exclusive international school rates. My lifestyle and my kids’ becoming very half pat as well 😉

    With everything else, there is choice – you can spend RMB1000 on a meal or RMB10. What do you want or expect?

    As every enterprise gets tax compliant, tax is becoming an issue for many people. While income tax rates similar to most Western countries, zero services are included. Expats expected to pay very high prices for medical, schooling and other services you might get wrapped into national services overseas. In addition, China has very few legal tax deductions and zero tax refunds.

    Overall, China is indeed getting significantly more expensive. However the opportunities also greater than ever before.

    Craig’s point that Tier 2 cities offer cheaper living and good lifestyles valid. Though I think we’ll see rapid changes in costs nationally including in Tier 2 cities… just not as extreme as in Beijing / Shanghai. The question there is whether you can create business opportunties as great as the tier 1 cities…

  8. Jesse Covner says:

    April 29th, 2010 at 6:25 am

    Hi Rich,

    As you know, I have not been on an expat package, ever. I moved out of Shanghai to Suzhou 5 years ago when my first son was born. Suzhou is cheaper than the US, but so are the places I lived in in Shanghai. I currently live in a very nice 3 bedroom appartment in the most expensive district of Suzhou and I pay 4000 RMB / month. I am now making international – level salary (for the time being anyway), but I know that if I move to Shanghai, I can find a place for less than 8K. Will I have a better environment in Denver? Probably. Would I have a job? Probably not. If you want to make a comparison, you need to compare Tier 1 with Tier 1 (ie. Shanghai to San Fran…and Shanghai). And then compare Manhattan to Puxi downtown. Its not too expensive for some expats to live in downtown Shanghai? Cry me a river!

    As for education…its always been expensive. That has not changed…if anything its gotten cheaper as there are more choices. What has changed is the pay-package for expats now do not necessarily include education expense.

    I’m maybe a little personally peaved by the tone of this post. Sorry… as someone who has worked here without the support of a large company, who has seen how companies mostly send people here who do not know what they are doing and do not learn… Expats mostly live in foreign “bubble” environment while their kids go to international schools… In Suzhou, the their companies’ often also provide cars. So, I generally think its a good thing that some leave China. It will drive down the price of international school. It will reduce rental inflation. It will increase the market value of us expats that are smart enough not to pay $7 for a sandwich at Elemental Fresh (and yes…I know YOU like that pretentious, overpriced restaurant).

  9. Rich says:

    April 29th, 2010 at 8:09 am

    Hey Jesse

    so, before I respond directly to your comments, I think I should highlight the fact that (1) I did say that many of the conversations were focused on the superficial everyday items, (2) I did not mention rentals. I was speaking about purchase prices.. because there is a difference (economically and psychologically) about investing in a house in Shanghai for your family that goes beyond one’s pay grade. It is about making an investment in the future of the city. .. and (3) I was not trying to make a distinction between overpaid expat and scrappy halfpats. I said that I was having this conversation with people I knew.. and I know both.

    So, yes, you are correct, there needs to be a more direct comparison on one level. That, on a numbers basis, you would be correct to say that living in NYC and living in Shanghai have a cost basis that would be more directly comparable than Shanghai and Denver. But, that is not the comparison that I have seen lately, or that I see most often. It is Denver, Reno, and other cities in the US where there is a stark contrast in lifestyle, pay grade, and other levels.

    that being said, in the last year I have been in about 10 US, European, and Asian cities … and I would say that Shanghai has one of the worst price to quality equations. That, staying with NYC.. you get A LOT MORE (it is US city after all), the quality is going to be higher, and (if eating Western food) it is going to be cheaper.

    More importantly, and on a wider investment angle, where I am seeing the most movement (debate and decision making) is when a person (or firm) is considering whether or not to invest real wealth in China.

    So, going back to your San Fran vs Puxi example. Select your average million USD investments in the Bay Area and Puxi real estate market, and you are going to immediately be faced with buying a zero lot line single family house in Palo Alto (or perhaps something with a bit of a yard in the East Bay), and in Puxi, you are going to be buying into a cement slabbed flat. No chance for a garden.. and while it may be a single family unit, you are hearing the neighbors above you tromp around…. and neighbors 8 floors down renovate.

    Getting into the numbers. In China, you are putting down 40% on that million USD for a 30 year loan (max) … but in the US, assuming you have good credit, you can get in on a 5-10% deposit with a 50 year plus loan… 400,000 upfront vs. 100,000 upfront.. 30 years vs. 50 years.. you are going to pay more in interest in the US (so that million USD is really more like 1.1), BUT, your payments are much more manageable…

    Now, I’ll admit that I am glossing over things a bit (fit out in US costs more, and there are tax differences)… but for some, even taking a pay cut from China to the US, it is an equation that may actually make sense to them. That, cars, ayis, and cheap foot massages aside, when you begin to really invest (i.e. put your company’s retain earnings or your personal earnings) into China, the equation is very different now than it was 5-8 years ago.

    R

  10. Website Design says:

    May 4th, 2010 at 6:32 am

    After 5 years in Beijing I packed up my internet company left China for good after the Olympics. Prices are not that high in China but it’s more about getting what you pay for.

    Sure renting a house can be cheap or expensive… but it doesn’t matter when the quality is poor. Same thing with office space or even hiring employees (there are great workers out there but I couldn’t find any). So basically you’re paying near western style costs in Beijing for quality that doesn’t compare to anything in the US/Canada/Europe in terms of office productivity.

    For the amount of work that was getting accomplished it was cheaper to move operations out of China and back into North America. Sure it costs more for an employee but overall on a per project base I get higher quality and more accomplished. Wages are rising fast in China and I don’t see the quality of work moving at the same pace (at least in IT).

  11. Jesse Covner says:

    May 4th, 2010 at 7:25 am

    Website Design, your comment is not about cost of living…its about cost of doing business. Implicit in that is whether or not the business and management model of your company works in China. That would be different for different industries.

    If I was setting up a website design company in BJ, I imagine it would be very difficult; low end market dominated by locals while WOFIs don’t need the service. If the company was primarilly using China as a development center, then you would need to find the best of the best in Beijing…and as Beijing’s cost is high, so will be the cost of the high-end talent. But this does not mean that using China as a development center would not work in other cities, with other business models.

  12. maurice says:

    May 4th, 2010 at 3:12 pm

    only for the riff raff

  13. jay Boyle says:

    May 7th, 2010 at 12:53 am

    After 16 years in China I can tell you some things have gone down in price and some things have gone up.

    Education has gotten ridiculous. It is cheaper to send your kid to a top grad school in then to Dulwich!

    Rents and western food and groceries has decreased. While all other assets except for autos have increased.

    Real estate in first tier cities is beyond overvalued. Their is no value compared to any other first world city. And once China implements US style property taxes I imagine we will see another bubble burst.

    The major question is sustainability and quality of life. For Americans with the new tax changes coming through it is becoming prohibitively expensive to be outside of the USA.

    Jay

  14. Lee Perkins says:

    May 23rd, 2010 at 8:34 pm

    Can’t help but think this is a bit of a Shanghai-centric perspective on China – and as most agree, Shanghai is a very special case in China. Prices seem to reflect nothing even remotely relating to reality in many aspects.

    I’ve lived in Western China for many years and now live in Beijing and all of the cities I visit regularly – Chengdu, Chongqing, Kunming, Tianjin, Beijing even Shenzhen and Guangzhou remain really competitive in terms of the cost of living.

    I must admit, I fail to understand the housing market in Shanghai which I can only assume is set a large scale readjustment.

    The definition of an asset bubble is when prices in a sector exceed real growth in incomes for a sustained period of time. Looking at the fact that wages in China have not seen growth on anything like the levels of real estate sector growth – even in Shanghai – its likely that some of this speculative over stretching of prices might be readjusted at some point.