The People’s Bank of China’s abrupt decision earlier this month to devalue its currency was characterized by Chinese central bank authorities as an effort to drive the currency toward more market-driven movements.
The yuan, or renminbi, which has been closely pegged to the U.S. dollar since 1994, when it fell by 30 percent as part of a break from the communist’s state central planning, had been rising steadily for most of the past decade. On Aug. 10, it was devalued by more than 2 percent, and allowed to move a bit more freely on a day-to-day basis. Two days later, the PBC devalued the currency again.
However, instead of restoring confidence in China, the moves were viewed as attempts to stimulate demand for its exports and bolster economic growth and a sagging Chinese stock market that many analysts suddenly concluded was worse than previously thought. They sent shock waves through global financial markets: Over the next 11 trading sessions, the Dow Jones Industrial would lose almost 2000 points, or 12 percent of its value.
So far this month, the yuan has dropped by 4.8% relative to the U.S. dollar, and by more than 5 percent compared to the euro.
What does this mean for apparel, accessories and footwear companies? As in most situations involving economics, the answer is: it depends.
In the short term, U.S. or European retailers and brands that source large amounts of product from China in finished goods form could benefit from the move, since it makes those products less expensive on a dollar basis. (For companies that have locked in their production contracts at fixed exchange rates, of course, the benefit will be less.)
How much product is sourced in China will have an impact on this short-term benefit. Fast-fashion player Inditex only sources 20 percent of its product in China, for example, but H&M’s proportion is at least 40 percent, according to analysts.
But despite the short-term benefits that lower import prices may bring, sluggish economic growth that the devaluation stemmed from is anything but good. The Chinese economy is the second largest in the world, and viewed by many apparel brands as the next big consumer frontier. For those aggressively expanding their footprint in China, like Inditex and H&M, specialty stores like Gap, and athletic brands Nike and Under Armour, economic malaise in China should be a cause for concern. A weaker currency will make U.S. goods more expensive, and may drive consumers to favor local brands or force U.S. brands to lower prices in the region, which will pressure profits.
Back home, European and U.S. retailers for whom Chinese tourists are a big factor will see a not-so-subtle decline in sales at stores in big tourist markets like Honolulu, Los Angeles and New York.
Luxury goods makers, already reeling from the Chinese government crackdown on corruption, which has curtailed the practice of “gifting” expensive accessories and other items, now find their products even more expensive in China. Chanel already lowered prices there to create global parity. Will it need to do so again?
Some economists see the weakening of the yuan as not nearly big enough to overcome sluggish global demand and rising costs in China that are hampering the country’s manufacturing industry, which may result in further erosion of the currency.
Yuan weakness also adds pressure to other Asian countries for which China is their biggest trading partner, and may cause them to devalue their own currencies to stay competitive. Vietnam devalued its currency, the dong, following China’s move. Though there’s little sign yet of a “currency war” unfolding, some Asian currencies have already responded by weakening on their own, including the Malaysian ringgit and the Indian rupee.
Companies competing directly with Chinese rivals, like those in Vietnam and India, may have the most to lose if Chinese goods become cheaper. Some Southeast Asian countries have seen their clothing exports increase dramatically since Chinese costs have risen.
Global players, whether from a sourcing or distribution standpoint, should be rooting for real economic health throughout the world’s key markets, and for organic, market-driven growth that all can benefit from.