eli5: Why are Chinese products so inexpensive?
In: 5
Let’s say you make lemonade. You go to the grocery store and buy lemons, juice them, add a bit of water and sugar and set it in a jug outside your house with a table with “Fresh Lemonade Sale $2.” You might earn $0.10 profit off of this. Which isn’t enough to be worth your time. So instead you start charging for $2.50 to get that sweet sweet $0.60 per sale.
Now what if instead of having to buy lemons… the government just gave them to you? And the water too…. it would be much cheaper for you to produce so you could sell for even less. That’s what happens with China. It has a lot of state owned companies in key sectors providing resources to private companies at incredibly subsidized rates. [All of China’s state owned enterprises are its biggest corporations](https://en.wikipedia.org/wiki/List_of_largest_Chinese_companies). This allows companies to get supplies for assembly and manufacturing at incredibly low input prices compared to what the US would get..
But let’s say you want to expand and have a second lemonade stand. You need to hire someone. But that pesky minimum wage law says you have to hire them at $10/hour. That means said person has to sell 40 lemonades an hour in order for you to turn a profit. Impossible, you’d never do that. China doesn’t have labor laws that protect their workers in the same way. This makes it a lot easier for businesses to pop up when demand is hot and shut down when it’s cold. Whereas with western companies it’s very difficult to fire people and the process can take a lot longer.
Finally there’s currency manipulation. The currency of China is called the Renminbi (translates to People’s Money) and it’s a suspicious currency that always seem artificially devalued. When your currency is worth less it makes your goods artificially cheaper for those buying them and it allows you to export more. Most countries WANT to have a currency worth less than the USD while also being able to roughly maintain their standard of living. How currency manipulation works is when you want to buy something you make your currency worth more and when you want to sell you make it worth less.
For example during the Christmas buying months the Chinese Renminbi crashed in price. Why would it crash in price during peak buying season for cheap Chinese goods? And then it’s now up 12% since Christmas. For the sake of comparison the Canadian dollar is up by 0.5% and the Euro is the exact same price it was near Christmas.
China has been accused of manipulating their price for a long time and with the way they manage their currency your lemonade business wouldn’t…. stand…. a chance
Latest Answers