If you’ve kept your eye on the news this week I’m sure you’ll have seen a lot on the significant drop in stock markets across the globe due to China’s fluctuating markets. Dubbed ‘black Monday’, China’s stock markets lost 8.5 per cent of its value by the end of the day, which continued throughout this week.
Whilst it’s very difficult to look into a crystal ball and see what it all means in the long term, the current uncertainty in Chinese investors is driven by concerns that the current rate of growth can’t continue. For the past 10-15 years China’s economy has been growing well into double digits, which is unheard of for well developed economies such as the UK and US, where a two or three per cent growth is considered good.
This year however, China’s economic growth has slowed to around mid-single digits and this is causing a crisis of confidence in the investment community. It’s had a knock-on effect in markets across the globe this week.
Investors in China don’t think the double-digit growth can continue and whilst they’ve yet to put that into perspective undefined, they are already taking measures to shore up confidence. A ¼ per cent was shaved off China’s interest rates to help boost investor confidence this week, but this takes time – the practical effect of this could be two years away.
Another measure was taken two weeks ago, when China devalued its own currency against the US dollar. Of course, this hasn’t gone down well in the US, seeing the devaluation as tantamount to a subsidy for Chinese exports. This is nothing new, China has kept exchange rates with the US artificially low for a long time now.
Chinese currency is controlled, not floated, so its not affected by stock market fluctuations like the USD or GBP. If it was floated the currency may well strengthen, but that would mean products from China would become more expensive.
Certainly, the US thinks it should move this way but, of course, there is a vested interest in the American manufacturing industry, which is taking quite a hit from the increased competition. US sentiment is that the exchange rate being kept artificially low is making exports cheaper for China, which they can’t compete with. China isn’t listening to this argument though, being much more concerned with continuing its economic growth.
So what does this all mean for outsourcers and service providers here in the UK?
The devaluation of the Yuan quite simply means that Chinese originated products, and products manufactured in China are going to be cheaper. So all of this instability in China’s market could actually be beneficial to us here in the UK. Of course, it’s more than just IT firms such as Huawei, Lenovo, or Xiaomi that come out of China, lots of manufacturing comes from China and so cost savings will likely feed through to every sector.
Add to that the strong performance of GBP against the USD recently we’re getting an even bigger kick back from that devaluation.
But, to take advantage of this devaluation, you’re actually going to have to invest in Chinese manufactured products – which may not necessarily have a Chinese brand name – but that’s a problem if you’re not planning any significant investments or upgrades to your IT infrastructure in the next few months?
Well maybe not, this isn’t a fire sale and you will be able to take advantage of the favourable rates longer term thanks to the UK IT channel. Partners, resellers, outsourcers and service providers that are importing vendor technology from China are able to take advantage of the rates now and continue to pass on the savings to end user organisations for a little while yet as China’s economy and its investment community get used to a new level of growth expectation.
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