Business Monday

Swings in China stock market: For middle market, impact is more about perception than reality

For South Florida’s middle-market businesses, the greatest threat from China’s recent stock market swings and economic slowdown is the negative perceptions — more so than any possible bottom-line impacts. Although the recent news of China’s unstable market and slowing economy has given rise to institutional panic, the continued direct volume of business between U.S. middle-market companies and Chinese companies — in China, as well as the current state of Sino-American trade relations — confirm that the situation is not as grim as some folks would have us believe.

One of the key complications of America’s economic relationship with China is a lack of transparency. It is difficult to say with any certainty whether the data is authentic or manufactured by the Chinese government. Either way, the impact of China’s stock market fluctuations is more about perception than reality. If people begin blaming any U.S. stock market drops on China’s stock market or the slowing Chinese economy, they will begin to clam up and buy fewer luxury products and focus more on necessities. Indeed, we have to be careful that perception does not become reality. If your middle-market business sells to Chinese companies or consumers, you may have a problem. Most Chinese consumers are not wealthy, but members of the middle class and even the wealthy who love Western luxury products are significantly cutting back on their purchases. We have seen this evidenced by major brands like Burberry, Chanel and Cartier, whose sales in China have taken a major nosedive. For Burberry in particular, China drives approximately 25 percent of total sales, which is indicative of how much luxury retailers have leaned on China for growth in recent years. It also has an effect on U.S. multinational corporations that rely on China for their growth.

Furthermore, the recent devaluation of the Chinese currency, the Renminbi, may also adversely affect middle-market businesses with ties to Greater China, as Chinese products are likely to become less expensive and thus more competitive on a global market.

In addition, the currency devaluation also may affect the number of middle-market companies that have been reaping the rewards of on-shoring: lower labor costs due to mechanizing and robotics, faster release to market, and reduced shipping costs. Despite China’s increasing labor costs, its lower currency value and production costs today may be beneficial in making it more attractive again to manufacture products in China, or at least stay in China. As China’s economy slows, it will be important to consider that its expected use of fewer natural resources may have a global ripple effect in terms of lowering the costs of natural resources as well as shipping and transportation, which may also negate some of the fiscal benefits of on-shoring.

Beyond this, there are some opportunities for middle-market businesses to reap benefits. Consider: Chinese companies have made a lot of money in recent years, posting an average 9.5 percent year-over-year growth since the 1990s. Wealthy Chinese nationals, eager for an exit strategy, are trying to get as many assets as they can out of the country, so there is a strong opportunity to sell to companies or partner with Chinese nationals who come to the U.S.

Another benefit: Since many U.S. manufacturers buy from Chinese manufacturers, lower prices will give those businesses greater margins, assuming that their sales numbers don’t otherwise dip. Lower costs of natural resources will also help increase margins.

So, what are the likely bottom-line impacts to South Florida’s middle-market businesses? Unless you have direct sales ties to China or have material customers who sell or supply a great deal to Chinese companies, it is not clear whether there will be any impacts. Since the economic fundamentals in the U.S. remain generally solid, the greatest threats will not come from the Chinese market swings but rather from any negative perceptions and concerns about possible impacts. So let us all relax, take a deep breath and keep our perceptions in check — it is in our best interest.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies: jcassel@casselsalpeter.com, linkedin.com/in/jamesscassel, casselsalpeter.com

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