Red Scare 2015: What Recent Market Volatility Means For Your Bottom Line
You may have heard the news; the sky is falling! China has started an international currency war and the global economy is doomed for the foreseeable future. Mass hysteria!
Not so fast. While it has been difficult ride for investors unable to stomach mounting losses in their portfolios, as of September 1st, 2015, worldwide GDP is still forecasted to grow by 2.6% in 2016(Moody’s). This tells us anyone predicting an economic calamity of 2008 proportions, where global GDP actually decreased by 0.7% in 2009, should be met with a bit of skepticism. Sensationalism sells, but it doesn’t inform.
So, what is going on with the Chinese economy?
The Chinese currency (CNY or Yuan), is normally valued at a fixed amount set by the country’s central bank. However, on August 11th, 2015, The People’s Bank of China announced measures that would ostensibly allow for the free market to influence their currency value more than it ever has before. This, combined with the release of economic figures that show growth is sputtering for the communist nation, put unprecedented, severe downward pressure on both the currency and future fiscal expectations.
Given China’s status as the world’s 2nd largest economy, the dim outlook sent massive ripples throughout the globe and created market volatility unseen since the depths of the housing crash. The Chinese central bank has already declared its intentions to curtail its ambitions of a more free currency, and seeks to place more restrictions on the Yuan starting in October. Yet, the uncertainty and market instability remains.
What does all this mean for small business owners?
China’s slowing economy will certainly have unpredictable and far-reaching consequences for entrepreneurs, but it doesn’t have to be all bad.
Over the past few years, it has been getting more expensive to manufacture goods in China. Wages have risen an average of 12 percent per year since 2001(The Economist, Mar. 2015). Strikes and protests are more and more common as a younger generation reaches working age. While this is a good development for the Chinese people, margins for U.S. businesses have shrank.
A depreciating Yuan could help widen those margins again. When every United States Dollar (or Euro, or Pound) is worth more Yuan than it was previously, the cost of doing business with Chinese producers falls. This fact especially affects the retail industry (and the discount retail industry even more so), since a wide variety of popular consumer goods are manufactured in China.
Other sectors such as Food, Housing, and Medical, are more domestic and will feel less impact while enterprises like Banking are more intertwined to the ebb and flow of the situation.
What should you do?
Those in less affected spheres of business will be able to do little other than see how the scenario plays out and react to the consequences accordingly. Stunted Chinese growth isn’t going to be the end of the world. Indeed, double digit economic expansion is not sustainable for any country in the long run.
For entrepreneurs who make a living importing Chinese goods, this could be a blessing more than a curse. Keep an eye on the headlines, and when it is time to renew your contract with your overseas supplier, leverage the facts against them and save yourself some hard-earned USD.