This paper attempts to study Mainland China’s prices and to construct a purchasing power parity between the yuan and a selected foreign currency. After considering the similarities in consumption patterns and demand structures, and the familiarity with the quality of goods and services, we chose Taiwan’s prices for comparison.
Owing to the scarcity of Mainland China’s data, the selection of prices for comparison was largely dictated by the availability of Mainland China’s prices. Most of Mainland China’s prices were collected from early 1979 prior to the price reform, and were arranged into two general categories: retail prices and wholesale prices. Only a few were ex-factory prices. After discarding the unusables, 223 of Mainland China’s prices were compared with the prices of Taiwan. As a result, two sets of price ratios – retail and wholesale – were computed in terms of NT per yuan. In each set, the priced goods and services were classified into 11 groups based on a slightly modified version of those used by Professor Kravis.
The weighting system used is a hybrid one. Two sets of weights constructed by the Taiwan Statistical Office were utilized to compute the average price ratio for each of the 11 commodity groups. Then, two alternative sets of inter-group weights, the Taiwan inter-group weights and the Mainland China inter-group weights, were employed to derive an overall purchasing power parity.
This is the conversion rate of the real per capita income in Mainland China. The price comparisons reveal an unusually wide dispersion of price relatives.
This demonstrates two peculiar features of Mainland China’s price and allocation policies – fixed prices and heavy government subsidies. The observed small markups between Mainland China’s wholesale prices and retail prices not only reflect their cheap labor costs, but also the low quality of their services.
