BEIJING — Fresh data out Wednesday from the Chinese government that shows slowing retail spending in the country indicates consumers here may be losing faith that China’s leadership will be able to steer the world’s second-largest economy away from a potentially sharp downturn, according to analysts.
World markets digested this news, and another yuan devaluing, in a turbulent manner. The U.S. stock market recovered from earlier losses and managed to close higher. The Dow Jones Index, which had been down as much as 270 points, closed the day in the green, just barely, moving up 1 point to 17,402. The two-day devaluation caused the European markets to close down sharply on Wednesday with the German DAX dropping 3.27 percent to 10,924 and the French CAC sliding by 3.65 percent to 4,925. There are fears that the cheapening of the Chinese currency will chase away those shoppers that have been flooding into Europe because of the weak euro. As a result, the luxury brand group of stocks all closed lower.
As for China, “When people look around, they see profits shrinking and lots of companies laying off employees. All bad signals,” Oliver Rui, a professor of finance and accounting at the China Europe International Business School’s Shanghai campus, said. “It is not consistent with the economic figures released by the government, so people think the real gross domestic product growth rate should be less. People are not sure whether [the government] is fully in charge or not.”
The July data, released by China’s statistic bureau, was disappointing, showing retail sales increased 10.5 percent last month from a year earlier. Sales growth has hovered around those levels since the start of the year, coming off an average monthly growth of 11.8 percent July through December 2014.
Meanwhile, data released over the weekend showed that exports slumped 8.3 percent in July from a year earlier. In June, exports grew by 2.8 percent, according to China’s customs bureau. China posted a 7 percent GDP growth rate for the first half of 2015.
The currency move comes at a politically sensitive time in U.S.-Sino relations.
Chinese president Xi Jinping is slated to visit President Obama at the White House next month and tensions will be running high if the yuan continues to depreciate. In addition, the U.S. is involved in the 12-nation Trans-Pacific Partnership talks and lawmakers used China’s devaluation to step up their calls for strong and enforceable language against undervalued currencies in the trade pact. China is not a party to the TPP talks but could potentially seek to join in the future if the deal is implemented.
China has said it wants to focus on its own domestic market and shift away from export-led growth. The pace of apparel and textile exports to the U.S. has slowed with that policy change, but also because companies have diversified their sourcing and shifted to other Asian countries and the Western Hemisphere.
But volatility in China’s financial sector combined with slow economic growth in the second quarter, a 10 percent appreciation in its exchange rate against all of its trading partners and poor export performance this year contributed to the decision to devalue the currency, according to IHS Global Insight.
China is the top supplier of apparel and textiles to the U.S., controlling a 48.4 percent share of the U.S. apparel and textile import market by volume, according to the U.S. Commerce Department. For the year ending June 30, apparel and textile imports to the U.S. from China reached $42.5 billion.
Economists and analysts said they don’t expect a significant impact in the short-term, though they expect a noticeable uptick in Chinese imports.
“The bottom line is this is not going to be a major game changer, but it will have a little influence here and there,” said Chris G. Christopher Jr., director of consumer markets at IHS Global Insight. “It means apparel will become a little cheaper and you will see a few more gains in Made in China [products] in the next six months. But China already has a strong [import penetration in the U.S.]”
Christopher said part of the impetus for China’s move as it relates to trade is likely to recapture some of the production it has lost to its neighbor Vietnam and other countries.
“Costs have risen higher and higher in China and a lot of multinational corporations are looking to Vietnam more and more,” Christopher said. “This won’t change the game much but it does help China keep their share and it is in their favor.”
Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, said, “There will be a boost to Chinese exports, but we won’t really see it for at least six months and even after that, much depends on what other Asian countries do with their currencies — whether they respond by intervening to push their currencies down against the dollar.”
Hufbauer predicted that China will intervene to support the yuan at the current level of an approximate 4 percent devaluation.
The executive added that the rising labor and energy costs in China could negate any cost savings from the devaluation for many companies.
Augustine Tantillo, president of the National Council of Textile Organizations, said U.S. textile producers who export are concerned.
“China remains a dominant player in the global market, so if they have the ability to reduce prices overnight through a currency devaluation, that is extremely troublesome,” he noted. “But beyond China itself there is the question as to whether this leads to other governments needing to devalue their currencies in order to keep up.”
Tantillo said a 2 percent devaluation can be significant for U.S. textile producers.
“We are not working at the retail level where margins are oftentimes significant,” he said. “We are working at the input, wholesale level where we are trying to compete on very small margins with manufacturers across the globe so 2 percent in our business is definitely a concern.”
If China’s currency remains weak for an extended period of time, it will boost apparel and textile export growth, said Phillip Swagel, a professor of international economic policy at the University of Maryland.
“But the big question is whether the current problems are temporary or instead presage the start of a long bout of uncertainty in the Chinese economy,” Swagel said. “The Chinese government has the ability to respond more, including to support the stock market and to avoid an overly weak currency that would cause tension with the U.S. and other nations. The key question is whether China is ready to do more, or instead will allow the weak [yuan] for the purpose of placating worried business interests at home.”
July’s weak economic data comes on the heels of a surprise depreciation of the yuan. That move coincides with turbulent Chinese stock markets, which have lost substantial value since June, impacting untold numbers of middle class investors who, encouraged by the government to invest, sometimes borrowed money to buy shares. Beijing has tried to prop up stocks by infusing billions of yuan a day into markets for weeks.
“Definitely the crisis in the stock market may have a negative wealth effect on people’s consumption behaviors, at least in the short run,” Rui said. “But the major impact is that people are not as optimistic about the real economy.”
Rui says the devaluation of the currency is partly meant to prop up weak exports, long a pillar of China’s economic growth. He added that the speed with which the currency dropped against the dollar was likely engineered to try to prevent a flight of foreign capital from the country.
“[Depreciating] within one week means lots of foreign capital may not be able to respond properly,” Rui said. “So that is why I think they chose this pace.”
Still, some say that for retailers there is no need to panic — yet.
Retail sales in China “are still fairly strong,” said Benjamin Cavender, a senior analyst with the Shanghai-based China Market Research consultancy. “I think what we are seeing is a little bit of fallout due to the recent stock market rollercoaster, and just the reality that as China’s economy continues to grow it just isn’t possible for it to grow at the same rate it has in the past.”
Cavender said the yuan depreciation may further shrink the margins of brands that import most of their products but that likely many retailers have planned for some decline in China’s currency this year “so hopefully are not too exposed.”
“That said, brands that are not positioned highly enough to have much in the way of margins will definitely feel the pinch,” Cavender said.
Managers of the China operations for foreign brands have reported for several months a murky situation where, in particular, high-end and luxury brands have been offering deep discounts on products in stores, online and in outlet malls to try to offload excess product to meet sales targets. Some have said such strategies have resulted in a situation where it is hard to gauge how well brands are performing.
“Of course, brands are worried,” said Torsten Stocker, Greater China retail partner at A.T. Kearney in Hong Kong. “Of course, most brands have a strong underlying belief that China will continue to grow, but just like some of the growth rates of the past were abnormal, some of the things we are seeing now are just natural corrections. Of course no one likes them, but they are just part of how an economy develops.”
On Wednesday, Fflur Roberts, head of luxury goods at Euromonitor International, said the devaluation of the yuan will have a big impact on luxury goods in terms of pricing and the gray market.
“The latest currency issues could further amplify the luxury price differentiation between Asia and Europe — we already have the issue of import duties as well as additional luxury tax which is placed on these products — particularly so in markets like China.
“Global currency volatility in itself is fueling the so-called gray market, which is a form of contraband activity mostly taking place between China and Western Europe. This is forcing many international brands to adjust prices in a number of key markets.”
Roberts said a surging and free-floating Swiss franc, a debilitated euro, a strong U.S. dollar and a strong British pound are some of the external currency pressures forcing European luxury goods companies such as Burberry, Compagnie Financière Richemont, Kering, Prada and LVMH Moët Hennessy Louis Vuitton to revisit their global pricing strategies.
“It is, arguably, the biggest challenge facing the luxury goods industry at this particular juncture,” she added.
“The problem is the ever-widening price differentials between Western Europe and China. In some cases, the cost of the same luxury brand is now 50 percent higher in China than it is in Western Europe. Inevitably, such price disparity has encouraged opportunists to buy up popular items in Europe, in bulk, and resell them in China at well below formal retail prices.”
She added that the latest currency issues now facing China could make this situation worse, encouraging the gray market further but also making the trend of shopping for luxury abroad even more attractive owing to its affordability.