The currency devaluation could benefit exports from China thanks to lower prices

The currency devaluation could benefit exports from China thanks to lower prices

Apparel industry executives are playing down the potential impact of the decision by China's central bank to reduce the value of the yuan to its lowest rate against the US dollar in almost three years.

Fears over the state of the Chinese economy jolted financial markets again yesterday (24 August), prompting another day of plunging share prices.

Contributing to the turmoil, which kicked off earlier this month with the decision by China's central bank to devalue the yuan to its lowest rate against the US dollar in almost three years, are China’s fourth interest rate cut since November and more weak manufacturing figures from China.

Data released on Friday (21 August) showed Chinese manufacturing activity slowed to a 77-month low in August as both output and new orders contracted at sharper rates.

The preliminary Caixin China Purchasing Managers' Index (PMI) dropped to 47.1 points in August, compared with 47.8 in July. An index above 50 means activities expanded, while one under 50 signifies contraction.

Individual components of the index show output, new orders and new export orders all fell at a faster rate from the previous month. Output and input prices also fell at a faster rate but, not surprisingly, falling demand led to an increase in stocks of finished goods.

Commenting on the data, Dr He Fan, chief economist at Caixin Insight Group said the PMI indicates “that the economy is still in the process of bottoming out. But overall, the likelihood of a systemic risk remains under control and the structure of the economy is still improving.

“There is still pressure on the front of maintaining growth rates, and to realise the goal set for this year the government needs to fine-tune fiscal and monetary policies to ensure macroeconomic stability and speed up the structural reform. This will lead the market to confidence and renew the vigour of the economy.”

For the clothing and textile sector the currency devaluation could benefit exports from China thanks to lower prices, but the flipside for retailers and brands shipping in goods to sell in China is to take a hit on margin or increase the price of their products.

China exporters not yet impacted

Hong Kong-based sourcing giant Li & Fung has said that the devaluation of the Chinese yuan may eventually help the company, as it buys export goods in China in US dollars.

However, this benefit has yet to kick in, as the yuan has not devaluated significantly enough. As of 21 August, the currency fell to CNY6.39 versus the US dollar.

“I don’t see [the People's Bank of China (PBOC)] going for a major devaluation,” said Li & Fung chairman William Fung in a press conference last week. “It would have to be more than 10% to affect exports,” he added.

A major Chinese garment exporter also told just-style that the yuan is unlikely to leave a mark on its export prices any time soon. The sales representative with Siris, a Zhejiang Province-based knitwear manufacturer which, with its 220 circular knitting machines and vertical integration is among China’s 50 largest, pointed out that the company has been pegging its US dollar/yuan exchange rate at 6.90 and has no plans for an adjustment. According to her, this means there is ample room for a further devaluation until Siris sales prices are affected.

Meanwhile, Li & Fung listed downward pressures from the deflationary environment and European currency depreciation as among the tough headwinds the company has been facing in the first half of the year.

Mixed fortunes for the US…

The devaluation of China's currency presents US clothing and textiles companies with a mixed bag of risks and opportunities, say industry associations.

On the one hand, Chinese clothing exports are on track to becoming cheaper, while imports of US-made products such as yarn or cotton will become more expensive, maybe making Chinese manufacturers less keen to buy them.

Jon Devine, senior economist for US-based cotton research and marketing company Cotton Incorporated said: “The exchange has shifted 3% since the Chinese government made its changes. For fibre imports into China (China is the world’s largest importer), which are priced in US dollars, a weaker yuan makes fibre more expensive (it takes more yuan to equal the same value expressed in US$).”

Julia Hughes, president of the United States Fashion Industry Association (USFIA), said she has so far seen a muted reaction to the currency situation from her organisation's brand-heavy membership.

“Maybe it really is too early to tell how this will play out,” she told just-style. However, reflecting today’s stock market instability, she added: “Maybe the real impact will be on what happens to the stock markets around the world."

Hughes said she attended the recent Men's Apparel Guild in California (MAGIC) convention in Las Vegas, Nevada, and noted: “No one really saw a particular impact from the devaluation. Maybe that's in part because they don't know what comes next."

Looking ahead, Hughes says that the impact to the US clothing industry could become more pronounced “if other countries follow China's lead and devalue. Vietnam has also done several devaluations recently."

…and the EU

European Union (EU) textile and clothing companies will be hit hard by the devaluation, and consequently the EU’s 2015 low-euro-fuelled export surge may soften or even stabilise, an industry expert has predicted.

In 2014, China became EU’s fourth largest customer after Switzerland, US, and Russia, exporting EUR2.85bn [US$3.31bn] worth of clothing and textiles to China, according to Roberta Adinolfi, economic and statistics manager at Euratex, the European Apparel and Textile Confederation.

This was a 10% growth in exports compared to the EUR2.6bn logged in 2013, she told just-style.

But now a devalued yuan could “strongly hit EU textile and clothing companies, in particular those for which China is a major export market,” she said. “The impact will clearly be more manageable for companies that were able to diversify their export markets and that are active in more specific or niche sectors.”

On the other hand China’s exports to the EU stand to gain thanks to lower prices. “China is already the EU’s first supplier of textiles and clothing products, and is predominant in particular in the segment of women’s wear with EUR11bn sold last year. China accounted for almost one-third of EU’s textiles imports and 39% of clothing imports in 2014, she said.

And “now China could further increase its exports to the EU by taking some additional market shares at the expenses of other Asian markets such as India, Bangladesh and Vietnam.

This would deepen the EU’s trade deficit with China. As of today, the deficit has reached EUR27bn in clothing articles and EUR7bn in textile products.”

With additional reporting by Jens Kastner, Ed Zwirn and Poorna Rodrigo.