China made the decision on Tuesday to devalue the YUAN against major currencies including the USD and the Euro, in an attempt to boost domestic growth following disappointing export results. This move has exposed concern about the momentum of the Chinese economy.
The decision to devaluate the currency was disguised as a bold market reform and executed by decreasing the daily reference rate by 1.9%. In doing so China seems to be resorting to old methods to generate growth
The weaker YUAN has rattled international markets.
In their domestic market the shares of Chinese airlines sank on the back of concerns that dollar debt costs will rise, as they will for all local companies that are exposed to USD denominated debt especially in cases where their revenue is generated from local markets. Airlines also felt the bite due to their exposure to paying in USD for their oil
In the USA a cloud quite like the one over Malta the past couple of days , hung over major indexes including the Dow Jones, S&P and Nasdaq Composite.
The companies hit by the devaluation were mainly companies that rely heavily on exports to China, including Auto and Luxury goods makers. Specific names include General Motors Co. and Tiffany & Co that fell more than 2.1 percent.
Similarly, after what was an already rocky period, Apple Inc. lost a further 5.2 percent.
This move also has the potential to weaken an already soft European recovery due to the relative decline in competitiveness against the Yuan.
When news that the Chinese government had devalued the Yuan hit, the consequences were similar to those for the US Markets, with European luxury accessories companies hit hardest. This is showing just how dependent they are on China and its economic well-being.
In Paris LVMH Moët Hennessy Louis Vuitton the company holding the iconic brand Louis Vuitton felt the hit with a 5% drop on during Tuesday trading. China accounts for 15.2% of the company’s revenue, adding up to $40.6 billion in 2014, its second-biggest market after the U.S.
Shares of Kering SA, recognized for its luxury label Gucci, were down nearly 4% as Kering earns 13.5% of its €10 billion of annual revenue in China.
BMW AG and Daimler AG also slid over 4% on the back of concerns that demand may dwindle as their products lose their allure to Chinese importers.
On the flip side of the coin, the companies who are set to enjoy the weaker Yuan are Chinese exporters due to the increased competitiveness of their products in international markets.
China Machinery Engineering Corp. rose as much as 5.9 percent in Hong Kong, while Lenovo Group Ltd. closed 2.9 percent higher. Each gets more than 65 percent of revenue from overseas.
One argument that can be made in favor of exporters to China is that some companies can enjoy this situation if their product is relatively inelastic to price changes. Apple would be a prime example of a company as their demand may be resilient to the depreciation as their customer loyalty and brand could protect them.
Aside from the effects on international markets,
One of the major impacts of the depreciation is its influence on the Federal Reserve’s timing to hike rates, who have looked confident thus far hinting of a hike by the end of the year. The Fed will be monitoring closely the repercussions of the devaluation on the economy, as they stated that they will take international market developments into consideration.
Also of interest are the capital outflows from China as a result from the currency depreciation.
According to Bloomberg estimates, for every 1% depreciation in the Yuan, would result in a 40BN outflow of capital.
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