I just thought I'd point out (as a bit of a continuation/explanation of what Brian said) that living costs in China are rediculously low (compared to the exchange rate for Chinese money). I was with my dad on a business trip to China last fall, and we found a cool little resturant. We got a good (by good I mean both big enough and well-cooked) meal including beverages for what is approximately $5. And that's for 2 people. A corresponding meal here in Sweden would be around $25 (at least $5 of that are the beverages). Because Sweden has a much higher level of minimum costs (partially because of regulations of living).
Also, yes, there is a need for the cheap guitars. Even though my family has a relatively good economy, my parents don't want me to assume that I can just get things every now and then, so they give me the child support that the government pays them, but I gotta buy anything I need myself. So buying a $400 guitar was something I thought about for a LONG, LONG time. What if I'd loose interest? What if it wasn't as much better as I was hoping? By having bought a much cheaper guitar, and had that for some time, I had proven to myself that I was seriously interested in playing guitar, which made me buy the more expensive guitar. And it was what I hoped.
Interesting, this thread got quite long.