China’s dramatic devaluation of the yuan by almost 2 percent on Tuesday could trigger other central banks, particularly those that have been taking export market share from China in the Asia region, to also devalue their currencies. The move weighed on international stock markets and is expected to have an impact on retail around the globe.

Following a slew of poor economic data early this week from China, the world’s second-largest economy devalued its currency by almost 2 percent. The greater-than-expected drop in exports and producer prices resulted in levels not seen since 2009. The People’s Bank of China move led to the yuan recording its biggest one-day loss in two decades.

European markets were down across the board, with Germany leading the way, closing lower by 2.7 percent, followed by the FTSE, which fell by 1 percent. Investors quickly began to assess which luxury brands had the biggest Chinese exposure and sold them off accordingly. Italy’s Salvatore Ferragamo gets 19 percent of its revenue from China and its stock closed down 5.5 percent to 28.53 euros, or $31.50 at the current exchange rate. LVMH looks to China for 15 percent of its revenue and its stock fell 5.4 percent to close at 164.85 euros, or $182.04. Kering, maker of Gucci, Saint Laurent and other labels, closed down 3.9 percent to 172.85 euros, or $190.86. China is Kering’s second-biggest market.

Other decliners included Richemont, which fell 4.2 percent to 80.70 Swiss francs, or $81.63. Hermès International lost 3.9 percent to close at 338.80 euros, or $374.12, while Hugo Boss AG dropped 2.7 percent to 109.68 euros, or $121.11. Brunello Cucinelli SpA shed 2.4 percent to close at 16.60 euros, or $18.33.

Commodities also sold off as a result of the yuan devaluation. Oil broke down to $42 a barrel, a level not seen since March 2009, to close at $43.45. Copper lost another 3 percent, adding to the 15 percent it has lost this year. The 10-year treasury dropped 3.9 percent to a yield of 2.14 percent.

The Dow Jones Index closed down 203 points to 17,405, the S&P 500 closed down 19.42 to 2,084 and the Nasdaq closed down 63.04 to 5,036.

“A series of macro-economic and financial data released recently made the market expectation diverge. Market makers paid more attention to the changes of market demand and supply,” a People’s Bank of China spokesman said at a press conference in Beijing on Tuesday.

“The PBC will monitor the market condition closely, stabilizing the market expectation and ensuring the improvement of the formation mechanism of the RMB central parity in an orderly manner.”

Despite not being explicitly articulated by the PBC, experts believe stimulating a lackluster export and manufacturing market was one of the major reasons for the dramatic move.

“In recent years, the Chinese authorities have made no secret of the fact they were aiming to stimulate internal demand and thus shift the balance away from the external sector,” Jane Foley, senior currency strategist at Rabobank, said.

“However, it can be argued that given the competitive gains that some of China’s trading partners have seen through currency depreciation, China’s exporters have been facing an increasingly hostile environment. In recent months, it has become very clear that the Chinese government is unlikely to hit its 7 percent growth target this year.”

China’s currency policies have long spurred calls on Capitol Hill to punish any country that deliberately undervalues its currency to gain a competitive advantage over U.S. manufacturers.

Lawmakers have tried for years to pass legislation that would crack down on currency manipulation, but all attempts have stalled to date. In addition, the U.S. has declined to name China a currency manipulator for several years in a biannual U.S. Treasury Department report, repeatedly citing progress by China to let the value of its currency appreciate.

China’s new move could increase scrutiny by the U.S. government. It triggered immediate reaction from lawmakers on Tuesday.

“China will stop at nothing to give its exports an unfair advantage in the global marketplace and this devaluation by the Chinese government is concerning,” said Sen. Sherrod Brown (D., Ohio). He said the devaluation comes on the heels of a commitment from the Chinese government to allow its currency to appreciate in the long term. “Today’s action comes after a period of appreciation, and it remains to be seen if today’s move is a one-time action or the beginning of prolonged intervention,” Brown added. “Given China’s history of currency manipulation, this depreciation must be monitored closely.”

He called for Congress, which is in a five-week summer recess, to pass a long-stalled punitive bill aimed at penalizing countries that manipulate their currencies and also called on U.S. trade negotiators to establish “rigorous currency disciplines” in the Trans-Pacific Partnership talks between the U.S. and 11 countries. China is not a party to the talks, but could seek to join at a later date if the deal is ever implemented.

Rep. Sander Levin (D., Mich.) also raised concerns about the devaluation.

“Although some analysts have suggested that today’s move is a step in the direction of a truly market-based exchange rate for the Chinese RMB, it is important to note that in many other respects, China is increasingly intervening in its stock market and other markets,” Levin charged. “There is reason to be skeptical of believing that the largest devaluation of the Chinese currency in over two decades is merely about moving to a market-based exchange rate. Therefore, we need to continue to review the facts underlying today’s devaluation and will be closely watching the actions taken by the Chinese government in the coming days and weeks ahead.”

​Levin, who has also backed legislation aimed at punishing undervalued currencies, said the action by China “highlights the need to include strong and effective obligations on currency manipulation in TPP, and to include a provision to impose countervailing duties to address currency manipulation in the Customs legislation that is expected to be negotiated in a House-Senate conference in September.”

According to Craig Erlam, a senior market analyst at Oanda, the move may trigger other central banks, particularly those that have been taking export market share from China in the Asia region, to also devalue their currencies.

“The question now is whether other central banks will follow suit and devalue their own currencies in some way in an attempt to ring-fence their own export markets, something that could further harm U.S. companies.”

The Bank of Japan, which has pushed the value of its yen currency down in order to stimulate its economy, seems to be unconcerned for now, suggesting that a 2 percent move isn’t enough to change things. Goldman Sachs also suggested the move, while historically significant, was unlikely to boost growth. It is being suggested that moves between 10 and 20 percent will be needed to markedly move the needle.

Brands that have become accustomed to major sales on foreign soil from Chinese consumers are also likely to see an impact from the currency devaluation, which will take some spending power away from Chinese consumers.

According to the 2014 China Luxury Report, released earlier this year by the Shanghai-based research center, Fortune Character Institute, 117 million Chinese went abroad last year, and total luxury purchases by Chinese consumers overseas rose by 9 percent to $81 billion, while luxury purchases in the domestic market declined by 11 percent to $25 billion.

The impact of China’s currency announcement was felt almost immediately in Japan, where sharp declines were seen in the share prices of Japanese retailers and consumer goods companies, many of which have become increasingly reliant on Chinese tourists, whose numbers have surged over the past few years, in part because of weakness in the Japanese yen.

Slicing the value of the yuan has the effect of making imported goods into China more expensive. Companies that depend on Chinese consumption will feel this pain the most. Also, Chinese-produced goods will become much cheaper, prompting more purchases of Chinese goods over goods priced in more expensive currencies.

The timing of Chinese goods flooding the U.S. market is not welcome news. Wholesale inventories rose 0.9 percent in June, when the expected amount was 0.3 percent. While some perceive this as a sign of market strength, i.e., building up inventory for upcoming sales, many zeroed in on the inventory-to-sales ratio going higher. This ratio determines how many months it will take to sell the goods at the current sales pace. That number increased from 1.29 in May to 1.30 in June, the highest it’s been since the recession.

Apparel inventories were up 2 percent from May to June. The inventory-to-sales ratio for apparel was up to 2.07 from 2.03 in May. These levels haven’t been seen this high since 1996.

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