'Made in America's' Resonance in China

News that the People’s Bank associated with China, the country’s central bank, changed its method for calculating the reference rate of the yuan (RMB) prompted the actual currency to fall to some four-year low.

Essentially, the People’s Bank of China is now determining the reference rate on a daily basis and incorporating market causes. Some financial experts argue that permitting market forces to help figure out the value of the yuan is reasonable, while others assert that The far east is merely trying to boost its own exporters – at the expense of foreign companies – by making their products relatively cheaper in the global marketplace.

Many in america are concerned that our businesses is going to be hurt, with some accusing The far east of currency manipulation.

The truth is, however, the value of the yuan is not important that much: China’s swelling middle-class and its insatiable demand for foreign (and US) products and services may easily offset the impact from a cheaper yuan. For now, anyway.

Growth within trade

Having been a professor as well as director of the Center for International Business Education as well as Research (CIBER) in the Eli Broad College of Business since 2001, I am always intrigued by dynamics and influences in international business, trade and worldwide competitiveness.

Much of what we do as a federally funded CIBER – one of just 17 in the country – is to strive to make US companies as competitive globally as possible.

Research We conducted this year shows that clients expect companies to sell 49% more in global markets in the next two decades.

Historically, this anticipated improve is primarily related to exporting more products to China. All of us companies have boosted their exports to China by more than 500% in the last decade, compared with typically only a little over a 100% increase to the rest of the world.

On the other side from the equation, US imports from The far east seemed to have stabilized (not really growing as much) before the devaluation of the yuan. A cheaper RMB will destabilize the export-import dynamics, but mostly in the short run.

Regardless of China’s motive (whether an intentional devaluing of the yuan to spur exports and economic growth or a competitive-based market realignment), a weaker currency usually leads to a decrease in imports because it is more costly to buy foreign products.

The rise of the ‘mainstream’

In the case of US products and services, the likelihood is that the trend associated with annual increases of exports to China will slow down but that we will see overall increases nevertheless, just not as significant, perhaps, as in the past 10 years.

This will hurt the top exporting industries from the US to China, such as crop production, computers and electronics, and chemicals, but, importantly, simultaneously we expect to see a drastic rise in the so-called Chinese mainstream customers.

That is, we expect that this population in China (read: middle class) will go from about 20 million to Two hundred million people in the next 5 years.

In other words, in all likelihood, even though the yuan may weaken the purchasing power of Chinese consumers, we can expect the general increase in mainstream (and affluent) shoppers to more than counteract this decrease in the value of the actual yuan.

By extension, urbanization in China has a chance to divide the country’s people in a more marked way due to the yuan devaluation.

Specifically, while the best players Chinese cities (advanced as well as developing cities) will soon consist of a vast majority of affluent as well as mainstream customers, the other parts of the country will be financially much less strong. And while the yuan trading in a lower value might help the advanced and developing metropolitan areas in China, the emerging and lagging cities will not begin to see the same benefit.

China’s conundrum

Perhaps the actual People’s Bank of The far east realized this conundrum already when, almost immediately after devaluing the actual yuan, it reversed course through selling off US dollars in order to stabilize its currency.

It also put out statements saying that there is no practical basis to expect that the trend of a depreciating yuan is a long-term phenomenon.

The opposite view is actually interesting though.

The reality is that the yuan has been appreciating for the last 10 years, many say intentionally so, at the hands of the central bank. This appreciation has helped slow the economy from double-digit development to just single digits. It has also meant that strategically, China has opted to focus on sociable stability, steady growth and maintaining the Chinese market as an appealing investment instead of the long run associated with unprecedented growth.

Whether these backing mechanisms will be viewed by the US and the rest of the world because currency manipulations or as more market-based financial strategy remains to be seen.

What we do know is that China remains an incredibly important market to trade into and buy from, and also the expected drastic increase in the total number of mainstream individuals it comes with an important part of developing a long-term technique for selling into China whatever the relatively small fluctuations within the yuan.

This could change, though, if the yuan is pushed a lot reduce and US consumers wind up snapping up far more Chinese products. However, so far, that does not appear to be the case.

US shouldn’t worry over cheaper yuan: China’s growing middle class will keep buying ‘Produced in America’ is republished with permission in the Conversation