While China may seem like it’s worlds away, its currency moves are likely to have a bigger impact on your business than you might expect, particularly if you’re involved in exports, imports, or manufacturing and selling in the U.S.
China is the largest exporter on the world stage, accounting for roughly 18 percent of goods shipped around the globe. It’s also the second largest economy after the U.S., with a gross domestic product of roughly $11 trillion, and half a billion consumers considered middle class.
And while policy makers and economists had long expected China to move to stimulate its economy, the 3.5 percent devaluation caught many people off guard. China’s central bank has pegged the value of its currency to the dollar since 1994. By lowering the value of the renminbi, it’s hoping to increase export sales at a time when manufacturing has steadily trailed off for months, and its domestic stock market has been in a free fall for weeks.
In fact, the move is not all that different from the U.S. program of quantitative easing following the financial crisis, where our own central bank increased monetary supply and decreased interest rates, which in turn lowered the value of the dollar for a period of time.
But the U.S. dollar has been on a tear in recent months, surging in value against other freely traded currencies like the euro and the yen. And the fear is that U.S. exports will become more expensive, and hence less competitive in foreign markets, particularly in Asia, where China’s currency tweaks have also caused other currency values in the region to fall. Simultaneously, a flood of cheaper Chinese products could be headed to U.S. shores.
Businesses Sound Off
To find out how things stand, I reached out to a number of Inc. 5000 companies that manufacture and export in Asia, to get their read on the situation.
The consensus is it’s still early days, and entrepreneurs like Alan Yu, chief executive and founder of Lollicup USA, are keeping a wary eye on the situation.
Lollicup manufactures paper products and disposable utensils for restaurants and consumers, and Yu says the net effect of the devaluation has been positive so far.
Twenty percent of the company’s manufacturing takes place in Chino, California, while another 40 percent takes place in China, and a further 40 percent occurs in Taiwan.
Yu says the falling value of the New Taiwan dollar, which has dropped about two percent since Monday in tandem with the renminbi, will make it cheaper for him to buy resins for his products, as well as finished goods from that country.
Yu says he’s far more concerned about an interest rate hike in the U.S., which combined with the falling renminbi could have a ripple effect, making it more expensive for him to export to places like South Korea, where he’s hoping to sell in the coming months.
“I’m more worried about the U.S. economy,” Yu says.
Similarly Amit Agarwal, chief executive and founder of Best Electronics, a reseller of electronics, based in East Hanover, New Jersey, says he’s taking a wait-and-see approach.
About 20 percent of his product sales, which are primarily of Apple and Samsung products like iPhones, iPads and Samsung’s less costly phones and tablets, take place in Hong Kong. Although Hong Kong is part of China, it has a separate currency, which is also pegged to the dollar, but it hasn’t been devalued.
What’s more, his products, in particular those created by Apple, have more cachet than competing Chinese brands, he says. So he predicts demand will hold steady.
“People will pay for this, no matter what,” Agarwal says.
Nevertheless, financial expert Drew Nordlicht, partner and managing director of Hightower Advisors, San Diego, says small business owners should be aware of the situation, and get ready to act.
“Cheaper goods is one aspect of the depreciation, and it is one of China’s major goals,” Nordlicht says. “If you are producing in the U.S., and competing domestically, one of the things you’re likely to see in your marketplace is cheaper Chinese goods.”