Reuters reporter Simon Rabinovitch, taking a page out of the Economist’s playbook, has introduced the “Grande Latte index” (with data, methodology and footnotes) in an attempt to answer a thorny econo-philosophical question: are lattes in Chinese Starbucks overpriced or is the yuan simply overvalued, contrary to the prevailing wisdom?
Rabinovitch contends that while the former is more plausible, “it might be equally true that the yuan, if not overvalued, is at least not as undervalued as other measures suggest.”
As he points out (emphasis FT Alphaville’s):
The cross-country cost comparison of grande (i.e. medium in Starbucks-speak) lattes shows that the Seattle-based coffee chain’s brew is rather dear in China. A grande latte costs $3.75 in the United States but $4.10 in China in dollar terms. It is even more expensive in Japan. The conclusion, that the yen is currently overvalued by 23 percent, accords well with the views of many analysts. But the idea that the yuan might be overvalued by 9 percent flies in the face of pretty much all conventional wisdom. It is also a drastically different perspective than that of the Big Mac index, which in its latest edition showed the yuan to be 49 percent undervalued.
The truth, Rabinovitch suggests, lies somewhere between the coffee and the burger – that is, “the yuan is undervalued, but not to the tune of 49 percent.”
Rabinovitch also quotes a Starbucks spokeswoman in Shanghai, who noted that while Chinese customers are somewhat price sensitive,
this is not their only deciding factor. They think the service we provide and the values that Starbucks represents are more important.
Erm, wouldn’t those values include beggar-thy-neighbourhood-coffee-shop capitalism?
Related links:
Starbucks in China: A Top Five List – China Beat blog
The trouble with Starbucks – FT
Attacks on China’s cheap currency are overdone – Economist