Chinas yuan devaluation could influence textile exports

China's yuan devaluation could influence textile exports

Exchange rate variations could "significantly" influence China's textile and apparel exports, a consultancy has suggested, after the government cut the guiding rate for the yuan for a third consecutive day.

The People’s Bank of China (PBoC) on Tuesday (11 August) announced a record "one-time correction" of 1.9% in the yuan’s value against the US dollar, weakening it by 1,136 basis points. This was its lowest level since 25 April 2013, according to the China Foreign Exchange Trading System.

Today, the PBoC set the mid-point rate at 6.4010 yuan for $1, a 1.1% drop from yesterday's 6.3306.

The move by China is designed to make its products cheaper in the global market and therefore more competitive in international markets, subsequently boosting exports and the economy. Yet it has widely been viewed as a devaluation, fuelling concerns the world's second largest economy is heading for a slowdown.

Export declines

Recent economic data has shown a decline in Chinese exports, with year-on-year value falling by 8.3% in July. This was despite projections of a 1% slowdown.

Industrial production in July rose 6% from the prior year, but this was a smaller increase than expected and below a 6.8% growth recorded in June.

For China's textiles and apparel industry in particular, export value in July was down 10.2% year-on-year to $27.25bn, according to Customs figures. For the January to July period, value was down 4.4% to $155.63bn.

Chinese market intelligence and consultancy firm CCFGroup believes the depreciation of the central parity rate of the yuan will likely put exports and the economy under pressure. "If the CNY continues to depreciate and the US dollar keeps its momentum, the depreciation may enlarge further. Therefore, China’s textile and apparel exports may continue to slide."

The PBoC has moved to allay fears from financial markets that it is embarking on a steady depreciation following fears of a "global currency war" and accusations the country is unfairly supporting its exporters.

In a statement, the Central Bank says: "Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan.

"China's economic growth is relatively high. In the first half of this year, [despite] a complex domestic and international environment, our economy still grew by 7%…maintaining a high growth rate."

Pricing challenge

However, for large foreign brands and retailers CCFGroup believes buyers will likely depress export prices.

"Foreign buyers may take further devaluation into consideration to avert risk," the consultancy firm explains. "China faces severe competition in most products exports and has a weak voice in pricing. The short-term devaluation will have a negative impact on prices rather than support it. According to some sources, some customers have asked for a re-pricing on agreed deals."

It will be global luxury players, however, that are likely to be hit hardest, given products may be more expensive and difficult to sell to Chinese consumers.

Fflur Roberts, head of luxury goods at Euromonitor International, notes that the latest currency issues "could further amplify the luxury price differentiation between Asia and Europe - we already have the issue of import duties as well as additional "luxury tax" which is placed on these product – particularly so in markets like China."

Global currency volatility is also is fuelling the so-called grey market - a form of contraband activity mostly taking place between China and Western Europe - she says, adding this is forcing many international brands to adjust prices in a number of key markets. "A surging and free-floating Swiss franc, a debilitated euro, a strong US dollar and a strong UK pound – these are some of the external currency pressures forcing European luxury goods rivals like Burberry, Richemont, Kering, Prada and LVMH, to revisit their global pricing strategies. It is, arguably, the biggest challenge facing the luxury goods industry at this particular juncture.

"The problem is the ever-widening price differentials between Western Europe and China. In some cases, the cost of the same luxury brand is now 50% higher in China than it is in Western Europe. Inevitably, such price disparity has encouraged opportunists to buy up popular items in Europe, in bulk, and resell them in China at well below formal retail prices.

"It is a notoriously difficult trade route to track, but some industry insiders believe that up to 40% of actual luxury goods consumption in China is now coming from the grey market (most experts believe it is fuelling at least 20%). What we know for sure is that the grey market is growing, and forcing the owners of luxury brands to take radical action to narrow the differentials. In practice, this means they are hiking prices in key European cities and dropping them in China but with the new currency issues in China this may no longer be possible for international brands."

Some of the retailers with the largest exposure to China include accessories business Coach, Canada's Hudson's Bay, and US department store Macy's, according to Cowen & Co analysts. "We have concerns that a weaker yuan may weigh on foreign tourist spending and add top-line headwinds for those with high exposure," notes Oliver Chen.

Marshall Gittler, head of global FX strategy at IronFX Global, adds: "China’s move is a big negative for the currencies of countries that sell to China and those that compete with it in third countries. This includes Australia, New Zealand, South Korea, Japan and the other Asian countries. The weaker CNY may make life more difficult for the Eurozone as well.

Total EU trade with China amounted to $638bn in 2014, less than trade with the US, which stood at $655bn.

As well as the luxury market, however, other retailers such as Nike, VF Corp, Ralph Lauren and PVH Corp, also have varying degrees of exposure to China and the recent devaluation. This, Cowen analyst John Kernan says, puts both "transactional and translational pressure" on each company’s high-margin Asia-Pacific business. And this is despite all four companies commenting in their most recent earnings calls that their China businesses were positive.

Nonetheless, the The International Monetary Fund has welcomed the move by China, explaining that greater exchange rate flexibility is important for China as it "strives to give market-forces a decisive role in the economy" and is "rapidly integrating into global financial markets".