Drew Bernstein, Co-Managing Partner of Marcum Bernstein & Pinchuk, Featured in Long Island Business News Article, “The China Syndrome”.
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In the weeks before U.S. markets tumbled, trouble emerged in China that, in retrospect, may have foreshadowed a U.S. fall ‚Äì and not just the season. Suddenly, it felt as if the United States caught the China flu.
Chinese stock markets declined precipitously and the Chinese government devalued the yuan, setting off global jitters and lighting a financial fuse that many say went on to burn the U.S. economy.
Suddenly, it seemed as if the U.S. and Chinese markets were inextricably linked. China’s Great Wall wasn’t enough to separate the U.S. and Chinese economies.
“It’s the second largest economy in the world, poised to be number one,” Drew Bernstein, co-managing partner of Marcum Bernstein & Pinchuk, the China arm of Marcum, said by phone from China. “And you want to ignore it?”
Exactly how and whether events in China triggered massive events in the United States remains an open question. But clearly, the China connection over the past few weeks led to problems.
There has been concern for some time that China has been slowing ‚Äì that the official data being put out by the Chinese government has been a little suspect,” said David Calone, CEO of Setauket-based Jove Equity Partners.
The Chinese government projects 7 percent growth in domestic national product. But a crisis in confidence regarding China’s numbers may have fueled U.S. market worries.
“The focus is on the prospects for growth in China,” said Jesse Mackey, chief investment officer at 4Thought Financial Group in Syosset, “which seem to have diminished significantly.”
China’s decision to devalue the yuan made Chinese services cheaper and more attractive to U.S. firms. But the move also prompted some to believe the Chinese economy was weak.
“The devaluing of the yuan is pulling out the stops,” Calone said. “The Chinese government feels the economy is slowing.”
Savio Chan, CEO of Great Neck-based U.S. China Partners and author of the book “China’s Super Consumers,” believes U.S. reaction was excessive.
“They’re overreacting. They haven’t seen a country of that size make global adjustments,” Chan said. “By and large, the demand for U.S. products, except top luxury products, is very strong.”
The upside of a downside
Chan, who focuses on promoting trade between China and the United States, sees China as more opportunity than problem, despite recent weeks.
His firm recently signed a contract with a large U.S. department store to expand in China. The retailer, he says, hopes to open 100 stores over five years and expand there via e-commerce by 2020, reaching $850 million in sales.
“China consumption is doing well,” Chan said. “Consumption is the way to go.”
Wal-Mart plans to open 150 stores in China and Macy’s is launching e-commerce there. Singer Taylor Swift is selling merchandise into China through JD.com as China opens up to e-commerce.
“Now you can sell a lot more to a lot more people a lot easier,” Chan said of greater ease in e-commerce.
The devalued yuan may even be good news for U.S. firms that manufacture in China.
Ronkonkoma-based Carson Optical, which designs binoculars and magnifying glasses in the United States and manufactures in China, sees a silver lining in the China cloud.
“The currency devaluation helps us,” said Carson Optical President Richard Cameron. “The weaker the currency, the cheaper the cost of doing things.” Cameron said as “the cost of labor skyrocketed,” product prices rose. He sees devaluation as boosting his business.
“This is only going to stop that increase,” Cameron said. “I don’t think it means things will get cheaper, but it will keep prices more stable.”
Bull in a China shop
While there seems to be a link between U.S. markets and China, it isn’t clear whether China’s troubles took a direct toll on U.S. markets. Falling oil prices and fear of impending interest rate hikes appear to be factors.
“The markets act in a way that is not objectively rational,” Mackey said. “No one has a bird’s eye view where they can see all the things going on and make a fully formulated decision. You can always make guesses, but financial markets are the agglomeration of millions of factors.”
Others said U.S. markets rose, setting the stage for a “correction” regardless of what occurred in China. “I think this is partially China, but I think it has to do with the fact that the stock market has run up,” Calone said. “People are nervous about China and possibly unduly nervous.”
Forces in the United States including concerns that the Federal Reserve will hike interest rates may have driven the drop ‚Äì more than concerns over China.
“They’re anticipating that at some point, the market has to drop,” Mackey said. “They pull out money in anticipation and the market drops.”
While stock markets ride a roller coaster, a big question remains regarding the state of the Chinese economy. Calone said there’s evidence it’s not as anemic as some fear.
“The points we can have faith in are data reported by U.S. companies on their sales in China, “Calone said. “Apple is saying their sales are strong in
China. That’s one data point.”
China is fueling demand for commodities and products, even if it’s not going as strong as in the recent past.
“Even though China is slowing growth, China is consuming a lot of oil, glass, metal, minerals and U.S. products,” Chan said. “Despite currency fluctuations and the stock market crash, China is unique. They have more cash than anybody.”
China has more than $3.7 trillion of foreign currency reserve, while Japan has $1.2 trillion, according to Chan.
China remains the top trading partner worldwide, Chan said.
Though luxury products may be impacted by recent events, “if you are not in those top brands that sell luxury goods, you’ll do fine,” Chan said. “The Chinese have a major consumption push.”
While U.S. investors worry about China, Chinese money is flowing into the United States as fast as ever. Brooklyn-based Forest City Ratner has sought funds from Chinese investors through the EB-5 program.
“There’s an enormous amount of money from China coming to the United States,” Bernstein said.
A crackdown on corruption in China has only increased the amount of Chinese money moving abroad.
“If you have $100 million, it’s not really yours,” Bernstein said of China. “It can be taken away at any time.”
Chinese investors quietly have become the second largest foreign purchasers of U.S. real estate behind Canadians.
“They’re purchasing tech business all over Silicon Valley, real estate. They’re very location-sensitive,” Bernstein said of a focus on the New York metropolitan
area. “Long Island is in the game.”
Chinese investors and companies create opportunities for firms like Marcum, with large Melville operations.
“You’re seeing Chinese investors coming into the United States. Everybody’s interested in that,” Bernstein said. “People are asking, ‘How do I become their broker, attorney, tax consultant? How can I make money from the Chinese here?'”
While Chinese stock markets may have taken a hit, China as a consumer market remains a ravenous giant in terms of population.
“Everybody wants to do business here,” Bernstein said from China. “There are 1.4 billion people here. When you plug 1.4 billion into any financial formula you can dream of, it works.”
The Chinese government liberalized e-commerce rules, providing more opportunity for U.S. firms, although Bernstein said e-commerce remains “heavily regulated.”
“Before you needed to have capital to open up a company and an office in China to sell online or off-line in China,” Chan said. “Now you don’t have to open an office in China for e-commerce. You can sell directly through Alibaba or JD.com.”
Distance, time zones and language all complicate doing business in China. Some 7,500 miles, a 14-hour plane ride and a 12- to 13-hour time difference build walls to commerce.
“Go to every university now. You’re seeing more western kids here who can speak and read it,” Bernstein said of bringing down language barriers. “These kids understand Chinese.”
While stock markets convulsed, the big promise may not just be about Chinese stock markets, but cracking China’s consumer market.
“As time progressed, people learned you need knowhow and resources to be successful,” Bernstein said. “It’s not like you have a successful business in New York and decide to open in Texas. It doesn’t work that way.”