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China’s Currency Falls Again: What Sourcing Executives Should Know

Now that China’s yuan has taken another tumble—down 1.1% against the U.S. dollar Thursday following a 1.6% slide Wednesday and Tuesday’s sudden nearly 2 percent devaluation—sourcing executives are left wondering what this will mean for costs.

The People’s Bank of China (PBC) devalued the country’s currency for the third day in a row, setting the midpoint (the benchmark exchange rate) at 6.40 yuan per U.S. dollar. Wednesday’s midpoint was 6.33 against the dollar.

The yuan fell by as much as 1.98% Wednesday, the Wall Street Journal reported, but the PBC stepped in to prop the currency up in final trading despite comments Tuesday that it would let the market play a bigger role in determining the exchange rate.

Since Tuesday, the currency has fallen a total of 4.4%.

In a statement released Wednesday, PBC said it will take some time for market makers to adjust the yuan’s relationship against the dollar and find the equilibrium price of the foreign exchange market.

“This may lead to potentially significant fluctuation of RMB central parity [midpoint] in the short run,” a PBC spokesperson said, adding however, “We believe that the market will have a more rational judgment on exchange rate after the temporary shock of a rate hike.”

Some executives in the sector don’t think the slight nudge in the yuan against the dollar will do much at all to rock the apparel sector, while others feel the move could cause goods and services from countries outside of China to be less competitive as China’s cheaper products would be more attractive.

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The devaluation has also stoked fears among companies exporting to China that the money they make in yuan will be worth less back home—but those importing from China will benefit.

In an interview on Bloomberg’s Earnings Edge, Bruce Rockowitz, CEO of branded apparel company Global Brands Group and former CEO and president of sourcing company Li & Fung (which spun off Global Brands last year), said China’s currency moves are good for Global Brands.

“A big amount of goods we buy for our brands around the world come from China and so immediately it becomes more of a buyer’s market than a seller’s market,” he said. “I think China is very clever to do what they’re doing because a big part of the stability in China is their exports.”

Rockowitz told Bloomberg China is not like it used to be. “Although it’s very efficient, it’s still quite expensive because of their renminbi and we see it as an opportunity to improve margins, to buy better.”

But China, he said, is just one part of the equation. Countries like Bangladesh and Vietnam have been competing strongly and keeping prices reasonable.

“Now what you’re going to see is probably all the prices coming down to match China’s devaluation,” Rockowitz said. “So I don’t think it’s a trade war, but I think it’s going to definitely put pressure on all the countries.”

Daniel Schwarzwalder, a senior managing director at investment management firm Buckingham Capital Management, which specializes in the retail, apparel and footwear sectors agreed, saying countries in the surrounding area like Korea and Vietnam will be at a relative cost disadvantage as manufacturers are more likely to make in China where the costs are being reduced.

China is trying to stimulate its economy, Schwarzwalder said, and the country’s moves this week will certainly do that for them.

So what does all this mean for sourcing?

“It makes the goods cheaper for us, so if you’re an apparel manufacturer, your pricing should go down, and if you’re big enough, you’ll push really hard for lower prices on stuff you’ve already placed orders for. I think the smaller guys will have a tougher time getting concessions on orders that were placed,” he said, adding, “Big guys like PVH or VF Corp., they’ll benefit on the manufacturing side, but if they have retail stores there, it gets translated at a lower value. Those doing retail are the ones who suffer unless they can re-price their goods, but we haven’t seen that yet.”

The 4.4% currency depreciation we’ve seen in China’s yuan this week isn’t significant yet, according to Schwarzwalder, but if it continues, reaching as high as 7 percent or upwards, sourcing could really see a shift.

If manufacturers are making in Vietnam, producing product is likely cheaper than in China, but now that pricing is 4 percent closer, and if the yuan keeps depreciating, pricing could become more on par and manufacturers might be less likely to move goods outside of China if they can find similar pricing there.

“The big question really is,” Schwarzwalder said, “Is this finished now or is this thing going to continue?”