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Weakening Chinese currency could hurt Maryland exports

What does China's devaluation of the yuan mean to Maryland?

China's decision to devalue its currency last week could hurt businesses in Maryland and elsewhere in the United States, experts say, especially if the Chinese yuan continues to weaken.

China is the third-biggest destination for Maryland exports after Canada and Saudi Arabia, and a consumer market for large, well-known Maryland companies such as Under Armour and McCormick & Co. Maryland businesses sold $714 million worth of goods and services to China last year, according to the International Trade Administration, including businesses that sell scrap metal, specialty chemicals, pharmaceuticals, electronics and transportation equipment.

"It was a good year for Maryland sales to China," said Bradley Gillenwater, the Asia regional manager at the state Department of Business and Economic Development. "A weaker Chinese currency will be bad for Maryland companies. ... What's happened in the last five days is not going to help any U.S. company exporting to China."

The Chinese central bank effectively cut the yuan's exchange rate with the dollar over three days, the biggest drop in decades. The sudden move was viewed as a strategy to boost jobs, exports and growth amid an economic slowdown in China, the world's second-largest economy.

The devaluation sparked howls of complaints from across the U.S. political spectrum and spooked global markets, even though the yuan remains up against the dollar over the past few years. What China really did was to expose the yuan a bit more to market forces, allowing it swing more up and down each day, but the currency fell because of the Chinese economy's weakness.

On Friday, the Chinese government pledged to seek a stable currency and boosted the yuan's value slightly.

A weakening yuan would hurt U.S. exporters, who stand to lose revenue when the currency converts to U.S. dollars, but would help importers of Chinese goods who would benefit from lower production costs, experts said.

"This could potentially lead to a decrease of exports to China," said Michael Runnels, associate professor of law and social responsibility at Loyola University's Sellinger School of Business and Management. "What is of concern to the U.S. politically is the trade deficit. If the Chinese yuan is placed lower, then the Chinese are able to flood the U.S. market with cheaper goods."

While the devaluation over days was too small to have an immediate impact on exports, "it is just the notion that the Chinese can suddenly change their currency, and how far are they going to take this," said Runnels, who spent the summer as a visiting professor at Beijing Institute of Technology. "If they continue to devalue their currency, that's going to be a red flag for any U.S. exporter."

Even before the Chinese government's move last week, McCormick's sales in its most recent quarter were depressed by the strength of the dollar in foreign markets, slipping 1 percent from a year earlier to $1.02 billion. Fluctuations in currency, including in China, could potentially hurt in areas other than sales and earnings, the spice and flavorings maker said in its annual report.

For example, currency fluctuations affect the availability of cash for buying raw materials and the value of investments in foreign subsidiaries, the company said. McCormick pulls in eight percent of its consumer sales and five percent of its industrial sales from the Asia/Pacific region and also runs three manufacturing plants in China.

"We have a great track record with our business in China," said Lori Robinson, a McCormick spokeswoman. But of the currency's decline, she said, "it's a bit too early for us to predict the impact."

Under Armour, which saw its international sales surpass 10 percent of overall revenue for the first time this year, declined to comment on the impact of weakening Chinese currency. The Baltimore-based sports apparel and shoe brand does not disclose how much of its manufacturing is done in China, which also has been a key part of its global expansion. This year, the company has opened dozens of stores in China.

Last week's devaluation follows years in which China's currency had strengthened against the dollar, helping U.S. companies gain a foothold in the market.

"In five days, we lost the progress made in the last three or four years," Gillenwater said. "There's no question, that's a shock."

If the yuan remains weak versus the dollar for months, he said, "I would expect the last quarter of 2015 for U.S. exports to China to be negatively impacted and hurt Maryland as much as some other states."

The currency change would hurt some industries in the state more than others, he said. Sellers of scrap metal, for instance, would have no trouble finding buyers in other countries. But more sophisticated products that are purchased well in advance of shipment, such as transportation equipment, might "sit somewhere in a Maryland warehouse because the product won't necessarily find a buyer," Gillenwater said.

Specialty chemical maker W. R. Grace & Co. is not concerned about the yuan's devaluation, said Gregory A. Ten Eyck, a spokesman for the Columbia-based company. Sales to China accounted for less than 6 percent of Grace's revenue last year, he said.

Perdue also expects no impact, said Julie DeYoung, a spokeswoman. China stopped accepting poultry imports in mid-January because of avian influenza, she said. The Salisbury-based company does not disclose the share of poultry production it exports.

Last week's devaluation "is small movement in the big scheme of things," said Alessandro Rebucci, an assistant professor at the Johns Hopkins Carey Business School with an international finance expertise. "What is important here is what is the change anticipated for the future? What do the last [few] days tell us about the future next few months and next few years?"

One view is that China "simply wants a larger role in market forces determining its exchange rate on a daily basis," as part of its bid to be accepted as a reserve currency in the International Monetary Fund's special drawing rights group, Rebucci said.

If the Chinese government is pushing currency down to boost its exports, there would be additional depreciation and further difficulty for U.S. exporters, he said. Companies would need to decide whether to raise prices on their exports — potentially risking the loss of market share, he said.

But Rebucci sees continued government intervention as unlikely.

"It would upset a lot of people," he said. "You don't want to give the impression of trying to steal demand from other countries."

Runnels said it appears that "the Chinese have tacitly agreed to let market forces affect valuation of the currency, one thing the U.S. administration has been asking it to do for years now. ... In the long term, this is a fiscal policy consequence that U.S. policymakers would look on favorably.

"At the end of the day, this is a good market signal as China is beginning to peg its currency to market forces," he said. "It creates better market certainty and a better environment for businesses to invest."

lorraine.mirabella@baltsun.com

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