Stocks

What China's Stock Market Troubles Mean for U.S. Entrepreneurs

What China's Stock Market Troubles Mean for U.S. Entrepreneurs
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Adam Callinan wasn’t planning to go to China next week. But with the Chinese stock market in a scary tailspin, the Los Angeles-based founder of BottleKeeper has booked an emergency trip.

Callinan, like so many American entrepreneurs, manufactures his products in China. In his mind, there have always been risks – quality concerns, corruption – and the collapse in equities over the last three weeks has only added to his uncertainty. Callinan worries that the factory owners he works with may have leveraged money to buy stocks, suffered huge financial losses and will have to close their factories. His emergency visit next week is to make sure the manufacturers that produce his stainless-steel beverage koozie "are still functioning."

“Everyone is freaking out, and we don't know how large the ripple effect will be," he says.

Indeed, the last few weeks have been nightmarish for the world’s second-largest economy. As of this past weekend, the benchmark Shanghai Composite index was down 30 percent from its June 12 peak, resulting in losses of more than $2.4 trillion.

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The meltdown ended a long period of explosive gains for the markets, which were up 150 percent from last June. The rally was due an easing of the rules surrounding margin trading, or the practice of buying stocks with borrowed money. Over the past few years, the markets have seen an influx of people engaged in margin trading, but Chinese authorities have begun to clamp down again. The recent selloff was triggered after the country's securities regulator announced new margin trading restrictions on June 12.

To stem the bleeding, the Chinese government on Wednesday banned major shareholders from selling any shares for six months and announced it will lend billions to brokerage firms to buy more stocks. Earlier this week, half of all listed Chinese companies had also halted their own shares.          

While the moves may have helped stocks rebound the last two days, confidence remains shaky among businesses that rely heavily on China for manufacturing. China is the number one destination for international manufacturing, which is why it accounted for 68 percent of the total U.S. international trade deficit in 2014.

"U.S. companies with large exposure to the Chinese market should recognize the risk and plan for it by shaving inventory down," advises Wendy Huang, CEO of the China Success Institute, a Beverly Hills-based practice that advises business executives on communicating with Chinese decision makers.

That’s exactly what Callinan is doing. While he's not planning on pulling out of China altogether, he is actively looking to diversify his manufacturing operations. This means moving a large percentage of manufacturing outside of China; Singapore and South East Asia are top contenders.

Still, the stock market crash may have its benefits for U.S. entrepreneurs. Ultimately, Callinan explains, it could result in lower manufacturing costs. As China's markets suffer and its currency loses value, American dollars are likely to become more valuable.

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Vishaal Melwani, the founder of men's clothing brand Combatant Gentlemen, understands Callinan's concerns, particularly because China's middle-class has been aggressively encouraged to invest in the stock or real estate market by the government. Factories that require high-end machines and raw materials often don't "front the costs," he said. "If they are overleveraged it’s going to be very difficult for them to keep the lights on."

Combat Gent’s suits and shirts are manufactured in China. Despite the risk of factories closing in the short term, Melwani believes that ultimately the stock market crash will dramatically lower his manufacturing costs. Over the last five years, as China's middle class has grown, manufacturers had less incentive to work with foreign companies due to growing demand from domestic businesses. As a result, manufacturing prices climbed dramatically, he says.

But the brewing market crisis may put an end to that. "We are already seeing prices go down," he says. "My best-guess scenario is that we see a return to the way it was before the U.S. recession, when Chinese manufacturers were cooperating to make sure they have orders coming in from the U.S. companies."

Melwani is planning a trip to China in August. Barring any "trigger signs" that the factories he works with are in danger of closing, he does not have plans to move manufacturing outside the country.

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