China’s currency is significantly undervalued against the dollar, according to the Economist’s latest Big Mac index, which found that the bestselling burger from McDonald’s cost 43% more to buy in the US than in the world’s second largest economy.
The yawning gap between the Chinese yuan and the US dollar, documented in the latest index, indicates that another round in the Sino-US currency war could be looming, although experts cautioned against taking the index as a stringent measurement of currency strength.
As the Economist, which invented the index in 1986, said: “Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible.
“The average price of a Big Mac in America in July 2015 was $4.79; in China it was only $2.74 at market exchange rates. So the ‘raw’ Big Mac index says that the yuan was undervalued by 43% at that time.”
Currencies linked to China through local trade also enjoy cheap Big Macs, illustrating how much south-east Asian economies have felt the strain over the past year as the Chinese recovery has run out of steam.
There are plenty of other factors that can undermine an index based on burger prices, which the Economist freely admits. In some parts of the world it is considered a premium food and priced accordingly. More importantly, it can reflect per capita incomes, which remain much lower in China and the developing world compared with Europe and the US.
For example, the cheapest Big Macs can be found in Venezuala, where a mix of subsidies, low taxes and growing poverty have kept the price low. The Economist also publishes a chart showing the burger’s price relative to individual incomes and unsurprisingly, the correlation is consistent; McDonald’s commonly prices its burgers according to what people can afford.
