There's a saying around here: "Everything in China is negotiable." Shopping, buying, and selling, they're all games. The seller plays and the buyer plays. Most of the time it is an amiable game, though sometimes tempers flare.
But have no fear, in the tourist-trade, everyone's out to make a deal and you just have to learn the rules.
Learn a Few Catch Chinese Phrases
Nothing opens the door for you like a Ni hao ma?, (How are you?) or a Duo shao qian? (How much?). Don't worry, you will not be plunged headfirst into a Chinese conversation. Nothing is bought or sold without the ubiquitous large-format calculator coming out so that everyone can easily view just exactly what digits are being discussed.
That said, whole transactions can even be wordless as you hand the calculator back and forth with the seller. But opening with some simple Mandarin phrases will ease you up to the bargaining table and will put a smile on the vendor's face. Read Chinese Phrases for Travelers to learn some phrases.
Start at a Fraction of the Asking Price
Deciding how low to begin your side of the bargaining depends on what you're shopping for. Typically, if shopping for inexpensive items, go 25-50% lower than the asking price. For example, a porcelain teacup should probably be about 25rmb (Renminbi or RMB is the currency of mainland China). If the seller asks for 50rmb, offer 15rmb and work up from there. If the item is very expensive, it's better to start lower, say 10% of the asking price, so you have more room to maneuver. There's nothing more disappointing in a bargaining game than starting too high and the seller agreeing too quickly!
Practice a Little on Inexpensive Items
Before you have your heart set on something, practice bargaining a little for something to which you are less attached and can, therefore, walk away if need be. Small inexpensive items like teapots, fans, and chopsticks can all be good things to buy for souvenirs. Warm up a little before you get into the higher ticket items.
Take Your Time
Being in a rush is the bane of the bargainer's existence. Time is not on your side: the vendor has all the time in the world to sell his trinket later in the afternoon. You are on a plane tomorrow morning and you've left yourself an hour to do your shopping.
If you can, take time and don't be rushed. If the seller isn't coming down on the item you want, walk away and peruse other stalls. You might find it cheaper elsewhere and you can use the price to drive the other vendor down.
Decide How Much You're Willing to Spend on an Item
A good way to defend yourself against the shopping demons that force you to pay too much for stuff you didn't really want is to decide as you look at something that it's worth to you. With everything I pick up, I say to myself "I'd pay $XX for this." This helps me focus my bargaining and when the price goes over what I want to pay, then I walk away (see next).
Use the "Walk Away"
In big touristy places like Panjiayuan Market or Pearl's Circles, this technique usually works quite well. After you reach an impasse and the price is still too high, give your final offer and walk away slowly but looking pointedly at other items. Usually, you'll be called back. Sometimes, however, you won't be, and you'll have to either live with the disappointment or put your tail between your legs and go back to pay a higher price.
Don't Feel Sorry for the Seller
Vendors love to play like you've ruined their day with your hard bargaining. You'll hear everything from "Now my child won't have any dinner," to "You are getting this for less than I paid for it!" Don't worry: they don't really mean it. The vendor is making a profit. They are not going to sell you anything out of the goodness of their hearts. It's a game and it's fun to play. So play right back and say something like "Yes, but now I can't afford to have any dinner either!"
Be Careful with Your Belongings
Crowded markets are a pick-pocket's haven. If you can, divide your cash up in several places (front pockets, money belt, wallet, purse) and don't carry your passport unless you have to.
Myth #1: Don't Dress up or Wear Jewelry While You're Shopping
Some people advise ladies to leave their wedding rings at home when they head out for a day of shopping in China. While maybe good if you're planning to flirt with the shop attendants, it's not really necessary. You're obviously foreign, so hiding a diamond ring is not going to suddenly make the vendor think you're a down-and-out expat who happens to be in the market for some Ming furniture. Be yourself and play the game.
Myth #2: Don't Carry Large Bills and Always Pay with Exact Change
Certainly, the vendor likes to peer into your wallet to see how many 100rmb notes you have stacked inside, but she's not going to suddenly change her price when she sees you could have paid double.