How hard can China’s economic woes bite Central Mass.?
Since mid-August, it's been hard to look at a newspaper or website without seeing a headline about the Chinese economy. The country saw its stock market crash, sending shock waves through global markets, and it devalued its currency and cut interest rates in an effort to jump-start flagging growth.
What does all this mean for Central Massachusetts, where many companies have built up increasingly strong ties with China in recent years?
Thomas R. Gottschang, an economist at the College of the Holy Cross in Worcester, said the first thing local companies should do is stay calm and think about the long term. For years, the Chinese economy had been growing at annual rates of about 9 or 10 percent a year, which just isn't sustainable.
“That kind of growth rate was possible because there were so many areas of the Chinese economy that were not well developed,” Gottschang said.
With much industrial development accomplished, he said, the Chinese government wants to create a more sustainable, consumer-based economy. One part of that effort is moving toward letting the country's currency, the yuan, which the Chinese government tied to the dollar in the 1990s, float.
“But that means you get these bumps in the road,” he said.
Those bumps are particularly visible in the stock market, which is less integrated with the real economy than in countries like the U.S. Between June 2014 and June 2015, Chinese stock markets grew 150 percent or more, adding $3.7 trillion in paper value in an enormous bubble.
Gottschang said the bursting of that bubble probably won't worry local companies that have done business in the country for years all that much.
“Those that just jumped in may have a shock,” he said.
Central Massachusetts firms have many kinds of ties to China. Some buy Chinese components, produce goods in the country through joint ventures with local companies, or sell finished products there.
Massachusetts exports to China were worth $2.3 billion last year, up from $1.9 billion in 2012, according to the Massachusetts Office of International Trade and Investment. The country is the state's fourth largest market for exports, after Canada, the United Kingdom and Mexico, and represents 8.4 percent of the state's export market.
Impact on Central Mass. firms
Among the big-name local companies with significant exposure to China is Milford-based laboratory equipment company Waters Corp. Early this year, the company opened a research laboratory in Beijing with the Chinese Pharmacopeia Commission.
Waters spokesman Brian Murphy said China was the source of 12 percent of sales in 2014, including products and support services. He said that, over the past five to 10 years, sales in China have outpaced its overall growth.
Murphy said the company does business in many countries, and changes in currency exchange rates are part of doing business.
“In the short term, it's difficult to tell how expected or unexpected currency and stock market movements impact customer behavior,” he said in an e-mail. “Generally any changes in Waters' business approach would be evaluated on a longer term basis, taking into consideration various factors.”
Other global firms based in Central Massachusetts have also seen some fallout from China's slowdown. EMC Corp. of Hopkinton reported that its sales in the Asia-Pacific region, which make up about 13 percent of all sales, dropped slightly in 2013, then held steady in 2014 while overall global sales rose.
Framingham-based Staples Inc. wrote in its financial filings that the significant growth it had previously projected for China failed to materialize over the last couple of years.
For local Central Massachusetts manufacturers that compete with Chinese companies, the nation's currency devaluation could be bad news, since it makes Chinese goods relatively cheaper. But Jack Healy, president of the Massachusetts Manufacturing Extension Partnership in Worcester, said there are also potential advantages. One is that local companies may find it easier to outsource work to China.
“One of the things that changed over the past several years was [Chinese factories] were only interested or focused on large production,” he said. “Now, I think they'd be interested in doing whatever business they can.”
Healy said Massachusetts companies will probably not see as many direct effects of changes in China as firms in other parts of the world. Producers of raw materials that help fuel Chinese production in places like South Africa and Australia are much more vulnerable.
“Their business has fallen to the floor, and they're definitely feeling that effect,” Healy said.
But, of course, in an increasingly interconnected world economy, nothing happens in isolation.
“I think it's going to have an effect on everybody in the sense that we supply a lot of these growing economies that are supplying China,” Healy said. “It will come back to us.” n
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