By Garrick Brown, Vice President of Research – West Region
The People’s Bank of China devalued the Yuan (also known as the Renminbi) this week. In fact, for the past three days in a row it has allowed its currency to fall. This, of course, set off gyrations on Wall Street and some analysts have even talked of “currency wars,” but what does it really mean? First off, it is critical that one keeps in mind that the Chinese economy grew at an annual pace of 7% in Q1 and Q2. While that’s a rate of GDP growth that Alan Greenspan would come out of retirement and give his left eye tooth for, it is the lowest rate of growth that we have seen from the Chinese economy in about six years. One of the primary factors driving this slide? Chinese exports have been falling. In fact, July 2015 Chinese exports were down 8.3% year-over-year. Economist forecasts had been for a decline of just -1.5%. For a country whose economic might has come as being manufacturer to the world, those are scary numbers. And so, before assuming any other motivations for the move, keep in mind that a devalued Yuan should help to make Chinese exports a whole lot more competitive.
Now is this the first step of a new “currency war?” Probably not, while spurring Chinese exports is the real reason behind this move, the People’s Bank of China has officially stated that the rationale behind this move is market reform (read their statement of August 11th). This move would tie into steps that the International Monetary Fund (IMF) has called for in terms of financial reform and increasing foreign access to its onshore stock and bond markets. The IMF will be deciding later this year whether to include the Yuan in its special drawing rights (a global reserve asset comprising the dollar, euro, pound and yen). Liberalizing the currency is one step that may help the Chinese in internationalizing the use of the Yuan, while also giving their economy a boost in the form of greater exports. Of course, the claim of “market reform” may be the perfect cover for a “currency war.” Certainly this move will lead to some entertaining and inflammatory musings from Mr. Trump, but it is just too soon to tell if this plays into a greater strategy of market reform or is the start of something else. But without getting into the weeds on the potential indirect impact of this move (like stock market jitters or the impact on global conglomerates with operations there), there are a few things where the impact of the Yuan’s devaluation should be clear. And most of it is pretty good news for American consumers…
More Expensive Exports
A devalued Yuan is not good news for American exporters. What does China import from the United States? The top ten products that China imports are (1) crude petroleum, (2) integrated circuits, (3) iron ore, (4) gold, (5) cars, (6) soybeans, (7) refined petroleum, (8) LCDs, (9) refined copper and (10) charcoal briquettes. From the United States, tech and agricultural products lead the pack so these sectors may all see a slight decline in their exports. But does this mean that Apple is about to have a big bite taken out of it? Probably not; but it will create some headwinds.
Could be—China is the world’s second largest importer of oil (after the United States) and a devalued Yuan means less Chinese buying power. Remember, oil prices are denominated in dollars so Chinese consumers and businesses will feel a pinch at the pump that is likely to curtail consumption. Reduced Chinese demand for oil will have a global ripple impact.
Low Interest Rates?
Cheaper Chinese goods will mean even less pressure on inflation, which is one of the factors the Federal Reserve has linked to their inevitable increase of interest rates. Could the devalued Yuan mean the Fed holds off on interest rate hikes until 2016? I wouldn’t bet on it as the Fed has continued to hint at ticking up rates as early as next month. But could it play a factor in slowing the rate at which the Fed would rollout further hikes? Absolutely.
This is the big one… and this one has potentially huge ramifications for U.S. retailers. In an extremely price competitive retail marketplace, this one could translate into even stronger markdowns and discounts ahead. The impact on the holiday shopping season this year probably won’t be all that huge simply because most major retail chains have already done the lion’s share of their holiday buying. But it will have an impact. There will be more bargains, more markdowns and more rock bottom prices this holiday sales season. And though the U.S. consumer is in a much better place than he or she had been just a few years ago, what drives sales this holiday shopping season will not have changed from what’s been driving sales since the economic downturn and that is steep markdowns. So get ready for a strong holiday shopping season… one where we are likely to see record new low prices for things like consumer electronics and insane door buster deals for televisions and the like. And, come November, when you see the television news story about that line of weirdos that have been sitting outside of a frozen Minneapolis Best Buy for five days just so that they can buy a flat screen for $50 come first thing Black Friday… well, just know that this is one of the reasons why.
This post is from the latest weekly edition of our DTZ Retail – Terranomics Retail Newsline, which you can subscribe to for free by e-mailing email@example.com
Garrick joined DTZ (Cassidy Turley) in October 2010. He serves as Vice President, Research in the Western US for DTZ as well as our retail division in Northern California, DTZ Retail – Terranomics. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.