[ By Chris, Devonshire-Ellis, Senior Partner, Dezan Shira & Associates ]

With the West likely to fall into recession during the next couple of years, now is a good time to evaluate purchasing polices from emerging markets as the household pinch on buying products extends up the supply chain to the source of product?in this case, China (although this perspective can also be applied to other currencies such as those in Mexico, Brazil, India, Russia).

Purchasing power parity is the art of recognizing the true value of the local currency, and applying that to buying techniques. Let?s take for example, the U.S. dollar and the RMB. According to conventional wisdom and current exchange rates, the U.S. dollar is valued at US$1 = RMB6.8. In fact, the two currencies are rather more similar than is commonly acknowledged.

Both currencies have the unit of 100 as their largest denomination. Both feature pictures of deceased leaders. Both are the most sought after valued note in their respective nations. Yet, according to the current exchange rates, the RMB100 is only worth about US$15 (give or take a few cents). Yet purchasing power parity holds that in China, the RMB100 note will buy the same quantity of goods or services as the US$100 will in America; in which case, the two notes are essentially identical in their respective domains concerning their ability to purchase.

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