The Chinese have been making headlines as the rest of the world watches their economy with a great deal of trepidation.
With news that the Chinese government is attempting to devalue the renminbi even further and their stock market in flux, Chinese luxury goods spending has begun shrinking for the first time. If it were any other country, the loss of $18 billion dollars in this sector might be shrugged off, but because the Chinese consume as much as 35 percent of the luxury goods currently produced by names like Burberry, Prada and Swatch, retailers are on high alert.
The Highs and Lows of Chinese Spending
As a result of the renminbi’s lack of buying power, Chinese nationals are spending less time abroad and making more careful choices when it comes to luxury buys.
Some brands may truly be in trouble without their Chinese markets in full swing, but many stand to benefit from a less valuable renminbi. A more favorable exchange rate for American companies means lower overhead for the production of those same luxury goods that the Chinese are currently opting out of purchasing.
With lower overhead comes lover overall production costs, so those same manufacturers don’t necessarily need to sell as many units. Alternatively, they can reduce the price on those items that the Chinese currently find too expensive and rediscover their favorite market once again.
What Devaluation Means in Real Terms
When the financial markets hear that a currency is being purposefully devalued, panic is typically the next response. However, some experts in the luxury industry don’t believe this is a worrying sign at all. In fact, Luca Solca, head of global luxury goods at Exane BNP Paribas, forecasts that a major devaluation would be required before a serious dent would be made in global luxury sales.
Solca’s estimates show that as much as a 20 percent devaluation in the renminbi would only affect sales by about five percent across the brands he tracks. “It’s often the case that markets react harshly to major surprises, a sort of ‘Shoot first, ask questions later’ approach. This looks like financial turmoil, not turmoil in the real economy,” he said.