How will China's economy affect American businesses?

November 2013 | SPOTLIGHT | INTERNATIONAL TRADE

Financier Worldwide Magazine

While many countries today would envy a 7.4 percent economic expansion rate, for China – the world’s second largest economy and the United States’ second largest trading partner – that number suggests the lowest economic growth rate in 13 years. Even if an American business does not deal directly with exports and imports from China, they want to know how the current state of China’s economy will impact them because China has become an integral part of business logistics throughout the US. In short, it is nearly impossible to find a business that can function independently of Chinese influence.

Manufacturing sector

China’s manufacturing sector consists of numerous industries that are engaged in the physical transformation of raw materials into consumer or industrial goods. Raw materials and labour come cheap in China and so for many multinational corporations it is highly efficient and cost effective to keep manufacturing production overseas.

For example, American corporations like Nike and Apple manufacture several of their products in China and then export to the United States and elsewhere. However, in 2012, China’s manufacturing sector took a hard hit due to a global slowdown in demand. Nevertheless, in May 2013, China’s official Purchasing Managers’ Index (PMI) stood at 49.2. Although this is a slight decrease from January’s 50.6 PMI, analysts still see this as an indication that the manufacturing industry in China is on the rebound. While this suggests that China’s economy is excelling, it also suggests the same of the United States. An increase in demand for production of consumer goods abroad also suggests an increase in consumer activity stateside.

Construction sector

Similar to the manufacturing PMI, the non-manufacturing PMI inched to 56.2 in January 2013, indicating a 0.1 increase over the December 2012 PMI. However, in May the PMI fell to 54.3. Nevertheless, it is important to note that much of China’s expansion from November to January was due to the Chinese government’s increased spending on infrastructure products such as road and railroad construction. Moreover, China’s residential property market has also experienced moderate growth in the past year, while the demand for commercial property has declined. Nonetheless, many analysts foresee that both industries will continue to enjoy moderate growth in 2013. This should not come as a surprise as China’s services and construction sectors account for 43 percent of the country’s economy.

Retail sector

In January 2013, the Chinese government released economic data that indicated China’s retail sales increased by 14.9 percent during November 2012 – the highest increase over the previous eight months. This too should come as no surprise, as many foreign consumer companies are attracted to profit-growth opportunities in China’s urban centres.

Foreign-based retailers of luxury goods such as Louis Vuitton and Coach have established thriving businesses in China. In turn, retail success in China allows investments from American corporate retailers to come full circle, giving their shareholders enviable profit-sharing opportunities largely unseen in other markets.

Nonetheless, there are mixed reviews from foreign retailers that have established stores in China. For example, in September 2012, Nike said that its China sales were weakening and had decreased six percent from the prior year. Also in September 2012, Home Depot announced that it would be closing all its stores in China. But Coach, an American luxury retailer specialising in shoes and handbags, continued to do well in China – so well that China is set to become its top market within the next three years.

Shanghai Free Trade Zone

To be launched in late September 2013, the new Shanghai Free Trade Zone will be the first of its kind in Mainland China. The zone is set to take the lead in China’s long-awaited market reform towards wider foreign exchange convertibility and more liberalised interest rates. Within the zone, existing regulations restricting use of the Chinese currency in cross-border business would be suspended, allowing for an unprecedented, wider use of the Yuan by firms in foreign trade. With the zone’s opening, companies operating in Hong Kong, a free port, may now be incentivised to move more of their business to the Mainland’s still fast-growing market.

The future

Given China’s slowing economic expansion, the government has accelerated investment project approvals, trimmed fees for exporters, and increased spending on infrastructure. For the United States, this translates into economic opportunity and advancement in profit growth. Even with a hiccup in production activity, economists continue to encourage businesses and individuals alike to invest in China.

Paola Sanchez Torres and Xingjian Zhao are associate attorneys at Diaz Reus & Targ, LLP. Ms Torres can be contacted on +1 (305) 375 9220 or by email: psanchez@diazreus.com. Ms Zhao can be contacted on +86 (21) 61946706 or by email: xzhao@diazreus.com.

Paola Sanchez Torres and Xingjian Zhao

Diaz Reus & Targ, LLP