A good friend of mine wrote a thesis at the University of Chicago, concerning behavioral economics, psychology and currency. It was an odd intersection of ideas, thought-provoking in areas you’d never considered before.
It’s the style of “out-there” thinking that dots the halls of a great institution.
Central Idea of the Thesis
She argues, in short, that the perception of the value of a currency doesn’t correspond 1:1 with its real value.
For example, at the time of writing, the dollar equals 6.83 Chinese renminbi, soon to be 7 if something doesn’t change soon. This means 100RMB is roughly $15, or the price of a meal at a quality restaurant, or food for a few days at normal restaurants.
She posits, that we treat 100RMB as less than its exchangeable value because 100 is an incomprehensible number at this scale.
100=15? That doesn’t make sense, and so when traveling in southern China, for instance, and we shelter ourselves in an air-conditioned mall from the sweltering, humid haze, and find ourselves among modern, trendy shops, that 100RMB note – which is standard issue from ATMs – becomes almost like play money.
She tested this with surveys in various countries, with currencies almost on parity with the dollar (like the Euro) and with others having outrageous exchange rates (like 23,000 Vietnamese dong to the dollar).
Treating Renminbi like Play Money
When you are just about ready to pass go in Monopoly, and happen to land on Park Ave, you never hesitate. You take those ugly golden 500 bills and throw them to the banker, who is either your 7-year-old cousin learning math or a fiendishly-cash-loving “friend.”
Monopoly money has no real value outside the confines of that particular game. (Unless, of course, you are betting on said game.) So of course you are going to spend what you got like it’s candy.
I read her thesis and considered it. The surveys and statistical evidence revealed a connection between high exchange rates and disconnect between real value.
But I never view that as personal. I’m a fairly budget-conscious person when I need to be. If I have a trip coming up, I check the finances months or years out to make sure it’s doable. When I was on study abroad in Paris, I spent maybe two euro on food a day, so that we could eat nicer on the weekends or travel.
So after I graduated and lived in China for two years, I one day found myself thinking of her thesis vis-à-vis my experience in the Middle Kingdom. I have to say there is most certainly a kernel of truth.
Foreigners in China Do Not Value the Renminbi 1:1 with their Home Currencies’ Exchange Rate
I must couch this first: generalizations only go so far. I do not speak for all foreigners in China, nor do I adopt this attitude 100% of the time. This is merely observational. The laowai in the Middle Kingdom are as varied as the nations they hail from.
Wages for an average, low-end-of-the-totem-pole English teacher in China are reasonably satisfactory. I could pay student loans in the US, pay rent, have fun on the weekends and travel, with just a little bit of frugality.
For the most part, however, I didn’t work that hard to make things work. When I went to the bar, my wallet was never the reason I passed up a drink. If I wanted to go to a nicer restaurant, I’d consider briefly what upcoming events I had, and more often than not, I went.
If I saw a 100RMB price tag, I viewed it as steep for China, but not prohibitively so. In some ways, that red C-note was like a $20 bill in the US.
My paycheck each month was really a flight ticket somewhere new.
My British friends didn’t usually worry about student loans or remittances back home. Often, they were spendthrift without realizing the value of their own currency.
It was highly psychological.
One, the Chinese government made it mighty hard to get money out of the country, so we might as well have spent it then.
Two, the high exchange rate (say 50 for a beer) brought on an air of “whatever.” 30? 40? 50? They all seem the same at that scale.
Three, the notes are just too damn colorful; they seem like Monopoly money.
Again, I don’t speak for everyone, and I don’t speak when I genuinely budgeted.
However, there is a huge effect, where if a foreigner were using dollars or euros or their home currency, and had to pay that 1:1 price with greenbacks or something recognizable, they never would at a given price.
$15 for a shitty cheeseburger? No way. 100RMB for a shittier cheeseburger? Bring it one.
There is a psychological disconnect between the real value of foreign currency with a high exchange rate and the perceived value.
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