When China devalued its currency in August, the news, along with an increase in global stock market volatility, heightened worries for American businesses. But the impact on the middle market is much less of a concern than many might believe, industry experts say, at least for now.
A spate of interest rate cuts in China, as well as recent drops in China’s manufacturing output and infrastructure investment, points to signs of an economic slowdown. But middle-market manufacturers aren’t exactly burning the proverbial midnight oil worried about the effects. While more midsize U.S. manufacturers are selling abroad than ever before, the revenue derived from Chinese exports is still a small percentage for most of them.
Data from the U.S. Census Bureau indicates that for all U.S. companies, and not just the middle market, exported goods totaled $885.5 billion for the year to date through July 2015. Canada topped the list, accounting for $166.6 billion, or 19 percent of U.S. exports, while Mexico came in second with $138.4 billion, or 16 percent. China ranked third with $65.4 billion, or less than 8 percent.
According to Thomas Stewart, executive director of the National Center for the Middle Market at the Fisher College of Business at The Ohio State University in Columbus, the devaluation of the renminbi and subsequent instability in the global stock market are likely to have an indirect impact on middle-market companies. “(This) affects the business investment climate, and there are macroeconomic effects, of course, that will show in the middle market as secondary,” he says. “But if China stops playing its part in global demand, everyone will certainly have to deal with it then.”
Of course, there is concern that a cheaper renminbi will mean cheaper Chinese imports flooding into the United States, raising competition for U.S. producers and potentially forcing price cuts. But Michael Nelson, an investment partner at Pritzker Group Private Capital, a Chicago-based private equity firm, reasons that minor ebbs and flows in currency shouldn’t create a big change in trade. “Short-term fluctuations aren’t a worry,” he says. The recent devaluation is a rather minor move, especially considering the strong upward gains in the currency since China revalued the renminbi and unpegged it from the U.S. dollar in 2005, he says.
“The general economic trends in the U.S. are improving with respect to jobs and housing data. There are some mixed signals, but overall the situation in North America is good.”
If anyone is likely to feel the brunt of the renminbi’s devaluation, it will be large vertically integrated global exporters; meanwhile, most middle-market manufacturing firms will have little exposure, notes Joe Brusuelas, chief economist at McGladrey, a Chicago-based accounting and consulting firm. He sees a rather modest impact on middle-market manufacturing firms and other U.S. producers of goods and services. “The degree to which the U.S. and Chinese economies are linked is less than one might think,” Brusuelas says. Luckily, the recent drop in worldwide commodity prices is likely to offset a minor slowdown in China. “I wouldn’t be surprised if the minor reduction in demand is alleviated by the lower commodity prices,” he adds.
While some are predicting a further devaluation of the renminbi, most likely over a longer period of time and in a more orderly fashion, it’s too soon to tell what exactly will happen and what the U.S. policy response might be. “It really depends on how deep the devaluation ultimately is,” says Barry Webb, CFO of The Carlstar Group, a Franklin, Tennessee-based producer of specialty tires and wheels for agriculture, construction and heavy industry. “If we see further declines, that’s when we’ll see an impact on U.S. manufacturers.”
For now, the changes are too small and too recent to impact U.S. manufacturers. Admittedly, says Webb, middle-market manufacturers in the United States are operating in a very competitive marketplace, and that continues to be the focus. He argues that business leaders simply can’t run a company constantly worried about the “what ifs.” “You can only focus on what you can control,” he says. “You can only focus on how you run your business today.”
Fortunately, he says, domestic economic conditions are on the upswing, and that bodes well for U.S. middle-market manufacturers. Webb adds: “The general economic trends in the U.S. are improving with respect to jobs and housing data. There are some mixed signals, but overall the situation in North America is good.”