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Uncertainty as China implements record yuan devaluation

Markets and Chinese consumers alike face increased uncertainty following the People’s Bank of China’s shock currency devaluation – with importers and travel retailers most affected.

The PBoC's surprise decision to devalue the yuan has stirred up uncertainty for markets and consumers alike.
The PBoC’s surprise decision to devalue the yuan has stirred up uncertainty for markets and consumers alike.

Importers and travel retailers look set to be disproportionately affected by the People’s Bank of China’s (PBoC) shock devaluation of the yuan (renminbi, RMB) which has seen the currency fall to the lowest value against the US dollar since 1994.

On 12 August, China’s central bank fixed the “official midpoint” for the yuan down 1.6% to 6.3306 against the dollar. This follows a similar decision on 11 August, with the currency pushed down by a total of 4% over the period.

In response, markets around the world fell for a second consecutive day as concern spreads.

In a statement, the PBoC said it had acted to bring the yuan more in line with the wider market. But analysts widely agree that the devaluation was intended to boost dwindling exports. Chinese customs officials reported that July exports fell 8.3% year on year, according to the Wall Street Journal.

Priced out 

The PBoC’s move will push up the price of imported goods in China, and has the potential to further suppress dwindling consumption rates of imported spirits brands. LVMH, Diageo, and Pernod Ricard have all recently reported disappointing results for the market.

Chinese travel spend is set to be negatively impacted as shopping overseers and in travel retail becomes more expensive. Planned purchases are also likely to be put on hold as consumer confidence dips over uncertainly surrounding future currency valuations.

Chinese travellers account for more than one third of total European luxury spending, according to a Reuters report.

Source: Xe.com
Source: Xe.com

However, Rain Newton-Smith, CBI director for economics, has a more positive view: “This move to allow the renminbi to drop a little could help support Chinese growth, against the backdrop of an unexpectedly sharp fall in the country’s exports in July.

“Although a depreciation in the renminbi against sterling will put pressure on UK exports to China in the short-term, the effect on Chinese growth should be beneficial to UK exporters over the longer term.”

The International Monetary Fund is similarly positive. An spokesperson for the global financial institution said that China’s move to allow market forces to have a greater role in determining its exchange rate “appears a welcome step”.

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