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UK outsourcing to benefit from China stock market woes

by Tom Mulvaney, Managing Director, Networks First

The impact of China’s economy woes are still being felt after ‘black Monday’, where stocks dropped 8.5 per cent on the day, and continued throughout last week. The impact of this has been seen across stock markets worldwide, with US markets down almost two per cent.

Certainly it’s very difficult to gaze into a crystal ball and see what it all means in the long term, but the International Monetary Fund’s (IMF) head, Christine Lagarde, warned that global growth will be weaker than expected in the coming months.

For the past 10-15 years, China’s economy has been growing well into double digits, something which is almost inconceivable in well developed economies such as the US and UK, where a two or three per cent growth is considered excellent. This year, however, China’s economic growth has slowed to mid-single digits and this is starting to cause a crisis of confidence in the investment community. It’s this uncertainty that’s caused the stock market troubles this past week.

However, Lagarde commented on Tuesday: “Asia as a region is still expected to lead global growth. But even here, the pace is turning out slower than expected – with the risk that it may slow even further given the recent spike in global risk aversion and financial market volatility.”

On 13th August, China devalued its own currency against the US dollar for the third time, in a bid to shore up investor confidence.  Of course, the US has seen this devaluation as tantamount to a subsidy on Chinese exports. It’s nothing new; China has kept exchange rates with the US artificially low for a long time. For outsourcers in the UK, this could well be beneficial and bring about cost savings.

They can do this because Chinese currency is controlled, not floated, so it’s not affected by stock market fluctuations like GBP or USD. I’d certainly think that, if floated, Chinese currency may well strengthen, but that would mean products from China would become more expensive.

US investors would certainly like to see China’s currency move this way, but there is a vested interest in the American manufacturing industry, which is taking quite a hit from the increased competition in China – the Institute of Supply Management confirmed that the US manufacturing industry’s growth has slowed in July.

So what does this all mean for outsourcing here in the UK?

The devaluation of the Yuan quite simply means that Chinese originated products, products manufactured in China, and outsourced business to China are all going to be cheaper. Whilst many investors are concerned about the unstable markets, for outsourcers here in the UK, it’s actually quite beneficial. But it’s not just outsourcers who are going to see cost savings, the benefits will likely feed through to every sector.

Add to this the strong performance of GBP against the USD recently and we’re getting an even bigger kick back from that devaluation two weeks ago.

However, taking advantage of these favourable conditions can only happen if outsourcers, hardware suppliers, service providers etc. are doing business in China, or with Chinese-owned companies.

Whilst the current financial conditions are here to stay for a while, it’s not necessarily going to be permanent so now is the time to start considering looking to China for products and services. Better yet, those outsourcers that are already working with Chinese-owned businesses are already realising the cost benefits meaning bigger margins for them, and cheaper services and products to their customers, who can continue to pass on savings for a little while yet as China’s economy and its investment community get used to a new level of growth expectation.

Networks First is a leading managed IT services and network support provider based in the UK.

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