The dramatic drops in the Shanghai, Shenzhen and Hong Kong stock markets have produced very obvious repercussions in global markets. In China, the nature and extent of the market drops have not been clearly reported, and in much of the domestic, government-controlled Chinese media, there is almost no mention of any alarming or substantial market changes. Most foreign experts seem to agree that as a result of global information flow (the “Chinese Great Firewall” notwithstanding) and increased education and sophistication within China, such is likely to add to the degree of cynicism within China regarding the government, the media, domestic and global economic stability and information flow.

...China at the same time firmly believes, and even when shaken with domestic turbulence it still wants to believe, that it is a dominant global economic superpower...

However, those outside of China should also recognize that such cynicism—especially among the middle and upper classes—is still strongly tempered by a fundamental patriotism among Chinese people in general, as well as pursuant to autocratic dominance by the CCP. This may seem contradictory, but it is reflected by the Chinese predilection for foreign luxury goods, foreign educational institutions and even foreign investments. But China at the same time firmly believes, and even when shaken with domestic turbulence it still wants to believe, that it is a dominant global economic superpower (and the truth of this seems beyond any credible dispute), and that this is the “Chinese Century.”

1. Big Chinese Money is in Real Estate, Middle Class is in Stocks, and Debt is All Around

As a general matter, there is extraordinary wealth discrepancy between the so-called “1%” and the remaining population in China, which eclipses the growing divide in the U.S. The wealthiest Chinese, like the wealthiest people worldwide, tend to have diverse investment portfolios, but with a very clear preference for real estate. So the recent market performance will have somewhat less impact on the wealthiest sector, unless China’s perceived “real estate bubble” bursts. As China has developed over the past 30 years, middle class citizens have comprised the largest investment sector in their stock markets, and those people will likely be most affected. The fact that so much of the Chinese domestic economy (and investments in the markets) is built upon debt also adds to the precariousness. In the midst of all of this market turbulence, China has lowered domestic interest rates. Even if this provides a short-term boost to its markets, it will only further  promote overarching indebtedness in the long-term. Those debt levels are squarely at odds with the traditional Chinese value of saving.

2. Costs of Goods & Services in China Will Drop, But It’s Complicated…

For outsiders, the costs for Chinese goods will drop, due primarily to the recent intentional (and substantial) devaluation of the RMB. The impacts of the devaluation have not yet worked their way through the commercial processes. It is clear that China has been caught between two worlds—as a supplier of goods, materials and services to the world, and also as a growing domestic economy, which also has both costs and benefits. Wage costs have increased throughout the country, with the most dramatic increases in the so-called “Top Tier” locations, generally in the cities along China’s Eastern Seaboard. Not surprisingly, the real estate prices in those same areas have soared. With newfound prosperity in general, costs of living also usually increase.

It is clear that China has been caught between two worlds—as a supplier of goods, materials and services to the world, and also as a growing domestic economy, which also has both costs and benefits...

The same cost increases have had an impact on China’s competitiveness with other global labor markets. Whether the devaluation of its currency will be sufficient to counterbalance the rising costs to foreign businesses of acquiring goods and services in China remains to be seen, although unquestionably it will produce lower costs for foreign businesses, at least in the short term. Longer term, as is discussed below, there are internal costs (and domestic inflation) that will likely continue or rise. This may result in foreign businesses continuing to move to other, cheaper labor markets for their production, and in greater difficulty for foreign businesses to enter Chinese domestic markets. Sales of Western brands and goods slowed fairly dramatically last year and are expected to drop further as a result of these new measures. However, China will continue to have the most conducive infrastructure for foreign exports, despite the (now tempered by currency devaluation) rising labor and other costs that are a necessary consequence of the nation’s growth.

3. Devaluation of the RMB Will Impact Sales into Chinese Markets

With the development of extraordinary wealth in China, in an equally astounding short period of time, the rest of the world is looking to the growing consumer classes in China. Of course, there is still an enormous class of impoverished people in China—by all estimates, this comprises a majority of the populace at large. But China, and most of the outside world, tends to focus on the middle and upper classes. And with China’s vast size and population, the numbers remain staggering. But the domestic demand for foreign luxury goods has recently been slowing under the current government’s policies, which include measures to try to limit and expose government corruption and favoritism, as well as tariff structures that cause the prices for foreign goods to be higher in China than in overseas retail outlets. Clearly, the new devaluation of the RMB will result in even higher prices, which likely will further depress the Chinese demand for foreign luxury goods in the domestic markets. The extent to which this will also impact sales of other foreign goods and services into China remains to be seen.

...if your business is not currently performing its manufacturing or assembly functions in China, in some circumstances this may be a particularly opportune time to make that move.

4. The Cost of Operations in China Will Drop: Good Time for Joint Ventures?

For foreign-owned manufacturers and others already operating in China (those that are producing or assembling goods and also selling in China), the profits from sales of their products in China will likely be impacted, particularly when RMB are converted into their foreign currencies for distribution in their home nations. However, the operation costs theoretically should decrease, as the RMB-based costs for labor, energy, equipment and facilities in China should drop due to the currency devaluation. In addition, the stock market volatility may boost local investments into equity joint ventures with foreigners, as they may be deemed safer investments with better returns. Accordingly, if your business is not currently performing its manufacturing or assembly functions in China, in some circumstances this may be a particularly opportune time to make that move, especially in the recently created special enterprise zones.

...overseas real estate markets appear to be the favored (but by no means exclusive) investment opportunities for wealthy Chinese investors.

5. Chinese Investments Overseas Are Likely to Continue

The general guess here is that the although the currency devaluation will make Chinese investments overseas more expensive, the market turbulence in China will encourage Chinese to continue to make foreign investments for asset protection and growth. Once again, overseas real estate markets appear to be the favored (but by no means exclusive) investment opportunities for wealthy Chinese investors. Despite additional recent regulations adopted in China that are intended to curb overseas “flight” of Chinese citizens and wealth, many expect that such measures will result in the development of more creative planning on how to establish “footprints” (again, usually real estate) in foreign countries. It is noteworthy that new domestic regulations in China may actually motivate the very behavior they intend to rein in, by the development of new (and often clever) means by which they can be circumvented. Finally, the devaluation may cause more Chinese tourists and students to avoid travelling or attending educational institutions overseas, but there are doubts as to the degree that such activities are susceptible to market forces.

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[David Woronov is a partner at law firm McCarter & English. He represents U.S. and foreign clients in international transactions, with specific focus on European and Asian markets. His areas of concentration include mergers and acquisitions and private equity, and involve advising on every stage of business development, structuring and management.]