As I watched the Chinese stock market plunge by 7 percent on two separate occasions last week I wanted to take another look at what the turmoil here means for US and Chinese entrepreneurs. Coincidentally, I find myself at the Puli Hotel's famous Long Bar where I wrote my last article on the Chinese economy for Entrepreneur. The last three times I’ve been here have all been during stock market crashes or currency devaluations. I’m being blamed for last weeks’ nose-dive by my team. They tell me I’m bad luck. The fact of the matter is that no one should be surprised by what’s happening in China.
So what does the future hold and what does that mean for entrepreneurs with operations here? I spoke with the same business owners in China that accurately predicted the The Great Fall of China to find out. While most are not optimistic on the health of the overall economy, they believe that the current situation in China presents opportunities for both themselves and others willing to take a risk.
It's a good time to buy in China to sell in the U.S.
The Chinese Yuan has dropped to around 6.5 to the U.S. dollar, its lowest point since April of 2011. Many expect the devaluations to continue in 2016. I concur and I also predict another 8-10 percent drop this year. As this happens, the price of goods from China will become cheaper. This is good news for US companies buying product from Chinese factories to sell them in the US. It is also good news for Chinese manufacturers. Their goods will be more competitive.
In addition, there is some talk and speculation about a devaluation war amongst Asian suppliers. Other countries, such as Vietnam, could start devaluing their currencies to remain competitive with China. The race to the bottom would result in further lowering of the cost of goods sourced in Asia, which, of course, is good news for US entrepreneurs buying product from Asia.
Mr. Bai, founder of Xingjia Plastic Manufacturing, agrees that the devaluation of the Yuan will continue. He was quoted in my last piece on the economy saying that “a financial typhoon is approaching.” It looks like Mr. Bai is correct. “The typhoon I knew was coming finally arrived. I think the RMB will continue to drop by about 10-15 percent in 2016,” he says.
Mr. Bai doesn’t believe we’re at the bottom, or that 2016 will be a good year for the overall economy, but he does think things will turn around in 2017. He believes that 2016 will be a good year for him and his US customers saying “overall it’s good for exporters and our customers. Add to that, a lower material price and this is a win-win situation.”
Mr. Bai took me around the development zone where his factory is located, pointing out what he called “ghost factories” that have gone into bankruptcy. He and other factory owners still in business sense they have weathered the storm. Considering all of these factors, Mr. Bai is already seeing order forecasts from US customers increasing to levels that he hasn’t seen in years. Several of his old customers switched to Vietnam for the cheaper labor a few years ago, have now returned for the better quality and the comparable pricing in China. Mr. Bai is now optimistic about his business, for the first time in years. He’s taking advantage of this change by purchasing raw materials while the cost of plastic, aluminum and steel are all lower, which will allow him to keep his pricing competitive when material pricing inevitably begins to rise. Many Chinese manufacturers are following suit, which is in turn, very good for US based buyers.
Chinese consumers are still spending.
Mark Secchia, founder of Sherpa’s food delivery service that operates in several cities in China, believes that there are opportunities for new entrants to the market. Based on his 20 years’ experience living in China and running Sherpa’s, he says that “a dip like this is always an opportunity. In the same way that when stocks crash, stockholders hate it, but anyone about to buy has their curiosity piqued. Likewise, entrepreneurs already on the ground are experiencing pain, but those who are thinking about entering in 2016 or 2017 will reap the benefits of a weaker RMB, lower salaries, and a government more willing to see things through the eyes of employers.”
I believe that Mark’s thoughts and sentiments are valid. While we have been operating in China for about five years, we are benefiting through policy changes that favor job creation. I have also seen an increase in the sales of our English, Portuguese and Spanish courses to Chinese citizens. The reason is that consumer spending has continued to rise. According to Florentin Servan, former vice president at EFG Bank in Hong Kong and now principle at Servan & Co. LLC, “the market always overreacts with regards to China. There’s not a significant portion of the Chinese population invested in the Chinese stock markets so market swings have a lower impact on individual consumer wealth than in the US.”
Because people aren’t watching their savings evaporate, they continue to spend. The last Five Year Plan set by the Chinese government made increasing consumer spending as a percentage of GDP a priority and set policies in place to do just that. In the US, consumer spending accounts for about 70 percent of GDP in any given year. In China, that number was only about 51.2 percent in 2014 but that’s up 3 percent from 2013. The trend in 2015 continued but final numbers aren’t out yet. The younger Chinese generations are also far more likely to spend their money than the older generations, which bodes well for entrepreneurs opening up shop in China.
Sell to Westerners in China.
One of my chief concerns a few years ago was that if US manufacturers left for places like Vietnam and Indonesia, then we would lose a valuable source of customers. US manufacturing companies utilize our Chinese courses and cultural training to better localize in China. If these companies were to leave, we would lose a significant portion of our current customer base. It wouldn’t have been devastating -- US companies will always need Americans who speak the language -- but it would have significantly hurt.
Another segment of our customer base includes US companies that sell to China. Fortunately, as stated above, the trends in Chinese consumer spending are still positive. There has been no negative impact on us from that standpoint. Right now is a good time for US entrepreneurs to enter the Chinese market but they need to understand the culture, language and buying habits of the locals.
Fernando Menendez the founder of Global-Step Consulting feels the same way. Global-Step is an international business consultancy based out of Shanghai, China. He is seeing his consulting service on exporting from China expand. Reasons for the growth? The devaluation of the Yuan has been a prime factor in the company’s success. He says “in your last piece I spoke about ‘turning around the omelet,’ that’s why I do it. Last year was hard on exporters and better for importers. Now export consulting is up and while imports should be going down because of the devaluation, demand continues to grow in China for high-quality western goods.”
The general feeling among the business owners I spoke with is that the current regime’s crackdown on corruption and economic policies are causing the turbulence in China’s economy. However, most believe that the country will benefit from these policies in the long-run and that the economy will turnaround in 2017. The current situation has actually helped both the manufacturing and service industry. This is the first time in a long time that pessimism wasn’t the overriding sentiment on the economy. While there is still plenty of pessimism, I get the sense entrepreneurs feel that the economy is nearing the bottom.
The turbulence in the Chinese economy is certainly not over, but in times like these there are always opportunities to grow.