The surprising devaluation of the Renminbi has created confusion amongst market participants and concerns over a potential currency war have emerged once again. While the PBoC’s comments noted that the adjustment was made to correct stifled currency misalignment and dismissed the need to depreciate further to boost exports, even though a devaluation of renminbi may indeed help revitalise the Chinese economy. In fact, when a country devalues its currency, this can lead to an increase in demand for those goods that now cost less in the currency pair.
What does it mean for those companies dependent on China?
Chinese policy makers’ decisions added to the pain for international companies by devaluing the yuan by the most in two decades, sending shares of European automakers, luxury manufacturers and industrial companies downwards. The devaluation of the currency in the short term reduces the value of their sales in the country, making Chinese producers more competitive. While in the longer term, it will help revive growth in China, for now it signals just how concerned the authorities are about the slowdown, and that there may be further pain ahead for companies operating in the country.
“If you look about what’s going on with the world economy – the decline in commodity prices, for example – those high prices created a lot of very rich people in certain parts of the world that spend a lot of money on luxury goods. I don’t think that the next couple of years are going to be as favourable for luxury brands as the previous ones.”
David Stubbs, J.P. Morgan Asset Management
Louis Vuitton sales in China, Macau and Hong Kong fell approximately 10 percent in the second quarter, Paris-based LVMH said last month. Asia excluding Japan accounted for about 27 percent of sales last quarter for LVMH, which also owns Moet champagne and Hennessy cognac. Other luxury goods companies also slumped, with Gucci owner Kering SA dropping 3.5 percent to 173.60 euros and Swatch Group AG, owner of the Omega watch brand, declining 4.9 percent to 410.80 Swiss francs. BMW’s sales in China dropped 0.1 percent in June, as the new-car market contracted for the first time in more than two years. The aforementioned sectors performed well as the Chinese economy developed, however they are exposed to the Chinese slowdown.
“China is clearly becoming a growing risk that materialises day after day”
Anne d’Anselme, Cogefi Gestion
While it remains to be seen as to how much of a dent the current movement will have on luxury spending by the Chinese, luxe brands can take solace in one thing: the ranks of China’s high net worth individuals is swelling. According to Bain, the number of Chinese with a net worth of at least 10 million Renminbi ($1.6 million) hit 1 million last year, double the number from four years ago. China’s 1% is much less likely to cut back on spending.
Is it time to sell stocks with high Chinese exposure?
Regarding the US, although the impact of a Chinese economic slowdown on the U.S. is likely to be muted, Goldman Sachs is still urging investors to stay away from stocks with significant exposure to China given the country’s laggard performance so far this year. European shares extended their sell-off after China allowed the yuan to weaken further, hitting export-focused stocks for a second straight day. China is the second-biggest buyer of EU goods after the United States and its surprise devaluation this week has heaped market pressure on European makers of cars, luxury goods and consumer products.
“I don’t think this is a tiny one off event, I think this is the beginning of a cyclical decline in Chinese demand as they have to correct a lot of the imbalances in the economy. The pain is probably going to last a lot longer than a couple of months.”
Boris Schlossberg, Managing Director, BK Asset Management,
While it remains to be seen as to how much of a dent the current movement will have on luxury spending by the Chinese, luxe brands can take solace in one thing: the ranks of China’s high net worth individuals is swelling. According to Bain & Company, the number of Chinese with a net worth of at least 10 million Renminbi ($1.6 million) hit 1 million last year, double what it was just four years ago. China’s 1% is much less likely to cut back on spending.