Not all are alarmed by yuan fall

The China Post - - COMMENTARY - BY PAUL WISE­MAN

A free-fall­ing Chi­nese cur­rency could make main­land China’s goods cheaper for for­eign­ers, squeeze Western com­pa­nies, dis­cour­age Chi­nese tourism, in­crease China’s ex­ports and com­pli­cate the U.S. Fed­eral Re­serve’s de­ci­sion on whether to raise Amer­i­can in­ter­est rates. If the yuan keeps fall­ing, that is. The Chi­nese cur­rency sank again Wed­nes­day, a day af­ter Bei­jing en­gi­neered the big­gest one-day de­cline in the yuan in a decade.

Be­hind the yuan’s fall is a wor­ri­some back­drop: The Chi­nese econ­omy is de­cel­er­at­ing. Growth for 2015 is ex­pected to be the slow­est since 1990. Fear­ful Chi­nese in­vestors are mov­ing money abroad, thereby de­press­ing the yuan. By de­valu­ing its cur­rency, Bei­jing was in some ways merely catch­ing up with the mar­ket’s sen­ti­ment.

Though some econ­o­mists fear Bei­jing’s move may trig­ger an un­con­trol­lable fall in the yuan — one that could desta­bi­lize the global econ­omy — oth­ers see lit­tle need to worry: They note that Bei­jing could tap nearly US$3.7 tril­lion in for­eign re­serves to stop a freefall if it felt the need to do so. Few doubt that China would in­ter­vene if nec­es­sary.

Still, the drop in the yuan — along with grow­ing ev­i­dence that China’s econ­omy is weak­en­ing — is shak­ing up global mar­kets. What hap­pens in China, the world’s sec­ond-largest econ­omy, in­evitably re­ver­ber­ates around the world.

Western Com­pa­nies

Stock in­vestors have been pun­ish­ing the shares of com­pa­nies that do big busi­ness in China. A cheaper yuan, af­ter all, drives up the price of for­eign goods in China. It hurts earn­ings, too: The rev­enue that for­eign com­pa­nies col­lect in yuan from China sales are worth less when con­verted back into their home cur­ren­cies.

Shares in Yum! Brands Inc., for in­stance, have sunk nearly 9 per­cent the past two days, The par­ent com­pany of KFC and Pizza Hut, it has 6,800 restau­rants in China and plans least 700 more this year.

Still, in­vestors may be over­re­act­ing to a short-term cur­rency move. Or they may be wor­ried about some­thing deeper: That the sud­den de­val­u­a­tion re­veals how fright­ened Chi­nese of­fi­cials are about the health of their econ­omy.

“It’s not about a mi­nor de­val­u­a­tion,” says Greg McBride, chief fi­nan­cial an­a­lyst at Bankrate.com. In­stead, “It’s all about yet another move of des­per­a­tion to juice the Chi­nese econ­omy.”

In Ger­many, econ­o­mists are mainly shrug­ging off the likely im­pact on lo­cal ex­porters. That coun­try’s mak­ers of autos and in­dus­trial ma­chin­ery, which de­pend on Chin’s mar­ket, are un­likely to be hurt much by the yuan’s drop.

A big­ger threat is the fun­da­men­tal fact that China’s econ­omy is weak­en­ing. That’s why Daim­ler, BMW and Volk­swa­gen have seen prof­its in China slip. They have partly es­tab­lished their pro­duc­tion in China, which makes the cur­rency swings less rel­e­vant.

Smaller Ger­man mak­ers of in­dus­trial ma­chin­ery tend to fo­cus on more so­phis­ti­cated goods and so don’t com­pete head to head with Chi­nese man­u­fac­tur­ers at the lower end of the mar­ket.

Lux­ury Goods

Newly wealthy Chi­nese shop­pers have been en­thu­si­as­tic buy­ers of lux­ury goods — de­signer bags, jew­elry, cloth­ing. But the eco­nomic slow­down is tak­ing a toll.

Even be­fore China de­val­ued its cur­rency, the Chi­nese lux­ury mar­ket was re­treat­ing. The Bain & Co. con­sul­tancy pre­dicted this spring that China’s lux­ury sales would drop 4 per­cent this year.

“The de­val­u­a­tion of the yuan is even more star­tling,” said Faith Hope Con­solo, chair­man of the re­tail group at Dou­glas El­li­man Real Es­tate, which works with lux­ury re­tail­ers. “I think all the lux­ury brands will feel the ef­fect but es­pe­cially Coach, for which China was a crit­i­cal mar­ket.”

Higher- end lux­ury re­tail­ers, such as Chanel and Louis Vuit­ton, may prove more re­silient, Con­solo says.

Lux­ury sales have al­ready been hurt by China’s anti-cor­rup­tion cam­paign. The drive against cor­rup­tion has made Chi­nese less likely to buy ex­pen­sive gifts for in­flu­en­tial of­fi­cials or draw at­ten­tion to them­selves by splurg­ing on lux­u­ries.

Tourism

China’s eco­nomic rise has lifted global tourism. Chi­nese tourists spend more than trav­el­ers from any­where else — US$129 bil­lion in 2013 alone, ac­cord­ing to the United Na­tions. And they zero in on high-end shops, spend­ing three times as much on lux­ury goods out­side China than they do at home, Bain re­ports.

The yuan’s drop makes it costlier for Chi­nese to go abroad. It’s un­clear whether the cur­rency’s fall will crimp their spend­ing, says Fra­nis Navarro of the Paris Re­gion Tourist Board. Still, he wor­ries that “when the yuan is weak, it’s a bad thing for tourist pro­fes­sion­als like (re­tail­ers), restau­rants or ho­tels.”

Luca Solca, lead lux­ury goods an­a­lyst at BNP Paribas, says Chi­nese con­sumers will now have less in­cen­tive to travel to Europe on lux­ury goods shop­ping sprees.

The Fed­eral Re­serve

The Fed­eral Re­serve has been weigh­ing whether to raise record­low short- term U. S. in­ter­est rates as the Amer­i­can econ­omy strength­ens. But a cheaper yen po­ten­tially re­strains U.S. growth by pinch­ing ex­ports and de­press­ing U.S. in­fla­tion, which is al­ready run­ning be­low the Fed’s 2 per­cent tar­get. Most econ­o­mists ex­pect the Fed to raise the short-term rate it con­trols — stuck near zero since 2008 — at its Septem­ber meet­ing. Will the yuan’s drop cause Fed pol­i­cy­mak­ers to re­con­sider? Prob­a­bly not, econ­o­mists say. The U.S. econ­omy grew at a steady 2.3 per­cent an­nual rate from April through June, and U.S. un­em­ploy­ment has reached a seven- year low 5.3 per­cent. The yuan’s tum­ble is “not a game changer for the Fed,” said Sara John­son, IHS Eco­nom­ics’ se­nior re­search di­rec­tor for global eco­nom­ics. “We ex­pect they will pro­ceed with a rate in­crease at the Septem­ber meet­ing.”

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