SHANGHAI -- China’s effective devaluation of its yuan currency, which by Thursday had fallen almost 5 percent in three days, is intended to boost the country’s flagging export growth. But aside from making Chinese products cheaper abroad, it will of course also make foreign goods more expensive in China.
And the devaluation comes at a time when the government is encouraging Chinese manufacturers to upgrade their technology, often using imported technology -- and when authorities have taken steps to promote imports, in an attempt to rebalance China's economy and reduce its trade surplus. In recent months they have reduced import tariffs on a range of goods, and pledged to ease cross-border e-commerce, partly to satisfy pent-up demand among Chinese consumers for better-quality goods.
So will the devaluation undermine these policies, and affect sales of foreign goods in China? Signs of global anxiety are already visible in the drop in share prices of global luxury companies this week. And Li-Gang Liu, chief economist for greater China at ANZ Bank, says there are grounds for such concerns.
“In general the devaluation will have a negative impact on Chinese imports. We may see less Chinese demand for luxury goods and, for example, good quality beef from Australia or milk from New Zealand,” he told International Business Times.
However, observers say the timing of the devaluation may help to limit the pain it causes Chinese consumers. For one thing, China’s yuan has risen so high in recent months -- in line with the U.S. dollar, to which it has long been pegged -- that foreign goods have become significantly cheaper. The current level of devaluation will not completely undermine this trend.
“Other currencies have depreciated quite a lot against the Chinese yuan. For example, the Australian and New Zealand dollars have fallen around 15 to 20 percent against the yuan since last year," Liu said. "So if China depreciates by 3 to 4 percent, that just means that it’s catching up a bit.”
The low price of global commodities, at a time when China’s demand for oil, gas and steel is relatively soft, will also help soften the blow of a hike in import prices, Liu noted, adding, “I don’t think commodity-heavy economies will fully lose their competitiveness in the Chinese market.”
Xi Feng, an independent market analyst in Shanghai, suggested that demand for imported goods should not be hard hit by this week’s devaluation. “From an outsider’s point of view it’s logical that shares of Apple [for which China is one of the biggest markets] or other luxury firms should fall after the devaluation,” he told IBTimes. “But I don’t think a 3 or 4 percent fall in the exchange rate will have such a big impact. China’s middle class still prefer foreign goods.”
The Chinese government’s recent reductions in import tariffs on many types of consumer goods -- including cosmetics, athletic shoes and fur coats -- will also help to compensate consumers for any price rises caused by the devaluation, while recent free-trade accords with Australia and South Korea also reinforce a trend toward cheaper imports in the long term, Liu said.
“Importers should not be affected so much because tariff relief was already put in place a few months ago,” he said. “So in effect the authorities are giving sweets to both importers and exporters, as they seek to placate the trade sector.”
One policy that could be affected is the recent trend for luxury goods retailers -- from Gucci to Cartier -- to follow the lead of the government’s tariff cuts by reducing their prices. “The price of these goods has always been higher in China than elsewhere, often by as much as 50 percent," Shanghai analyst Xi noted. "But this year they’ve been reducing the level of the markup.”
'Some Price Advantage'
But ANZ’s Liu said that luxury retailers, who have seen queues outside their stores in Shanghai this year as consumers seek to take advantage of the price cuts, will not need to pass along the full effect of the yuan -- or renminbi (RMB) -- devaluation to their Chinese customers.
“I think probably they could continue to keep prices down,” he said. “Most of the luxury goods sold in China are from EU economies, and the Euro-RMB exchange rate still favors the euro a lot. So they still have some price advantage.” China would remain “the most important growth market for luxury goods,” he added.
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If the devaluation affects consumer confidence, this could hit spending, however. Some reports from Shanghai say people have been queuing up to change yuan into U.S. dollars in case of further devaluations. Shanghai analyst Xi said that, while he saw the devaluation as a “rational” response to China’s slowdown in manufacturing growth, it could encourage some wealthier people to “consider whether to move property and other investments out of China.”
However, Xi added that the central bank was clearly seeking to prevent this from happening, and insisting that the exchange rate had basically stabilized. ANZ's Liu also noted that the People's Bank of China appears to be taking steps to “intervene to keep the exchange rate at around 6.45 yuan to the dollar,” or approximately 3.5 percent lower than prior toTuesday’s devaluation.
Overall, Liu said, the devaluation may have little effect on consumer confidence, which has been relatively low in recent months anyway, due to the fall in the value of China’s stock markets since June and the overall “sluggish economic outlook.” Liu said most domestic consumers were still mainly concerned about the price of domestic products such as pork rather than the cost of imported goods. And while the devaluation could help some export firms, and provide a “small lift to the economy,” he said this would still have a limited impact on factors such as wages and employment. He added that further cuts in bank lending rates might be needed if the government were to achieve its goal of stimulating consumer spending.