It may seem like the U.S. has a pretty big problem with China right now. Except it really doesn’t.
Yes, the Dow Jones Industrial Average fell 1,000 points at the opening bell Monday, and it has already erased most of its gains for the year, in reaction to China’s devaluation of its currency the renminbi. And you have to go back to the dark days of the latest recession, when investment bank Lehman Brothers folded to find a market swing like the one experienced today.
But this time, it’s not a swamp of bad mortgages that’s causing the volatility. Instead, it’s the economic woes of a country that’s going through its own growing pains. True, a great deal of China’s economic fate is entwined with our own. It owns close to $4 trillion of our debt, and as the second-largest economy in the world, it’s also responsible for roughly 15 percent of global exports. And U.S. entrepreneurs have flocked to China for its cheap labor and manufacturing wherewithal for decades.
Yet China is struggling to become a first-world economy, which means opening itself up more to outside influence. And it’s doing so at a time when consumer demand around the world has flagged. By manipulating its currency, reducing its value by 3 percent in the past few weeks, it hopes to make its own products cheaper and hence more appealing to prospective buyers around the globe.
While that’s likely to be bad for U.S. small business owners in the short run, events in China are not likely to push our own recovery into recession. Some economists predict that China’s turmoil will shave half a percentage point from U.S. growth that is expected to be between 2 and 3 percent for 2015. While that’s not great, the longer-term benefits could outweigh the downsides.
Here’s a look at the positives:
- An end to currency pegging: China has pegged the value of its currency to the U.S. dollar since 1994. In doing so, it has been able to manipulate its value in a manner that effectively taxes U.S. imports, and subsidizes its own overseas sales. But China wants to be one of the global currencies in the International Monetary Fund’s special drawing rights basket, which is how that organization lends out money to developing nations. So it will probably have to undo its peg, and let the renminbi float against the values of other currencies, just as the dollar, euro and yen do. Without the peg, the Renminbi might increase in value. And ultimately, the U.S. could improve its trade imbalance with China with more competitively priced products.
- More reasonable company valuations: It’s been a six-year bull market in the U.S., with a lot of froth, primarily in technology stocks. And the forth has spilled over into private company valuations too. Look no further than the ever-growing number of unicorns, private companies with values over $1 billion. There are about 130 of those now, more than double the number from two years ago. The market drubbing is already taking some of the air out of a potential stock market bubble. It may cause investors to revalue private companies too.
- Continued low interest rates at home: Federal Reserve Chairwoman Janet Yellen had hinted earlier in the summer that the central bank’s core interest rate, which has remained near zero for about eight years, could increase as early as September. Now, with stock markets across the globe falling, the Fed is likely to hit the pause button on that plan. That means cheap money is here to stay for a while longer. So if you need to borrow to fund operations or to acquire another company, you’ll be in luck.