On Tuesday the People's Bank of China (PBoC) devalued the yuan by 2% in a surprise move to boost the country's flagging economy. Though this was supposed to be a one-off depreciation, the PBoC stunned the world's financial markets by continuing to devalue its currency yesterday and today as well, sending investors into a panic. Rather than being controlled centrally, the yuan's value will be determined each day by the PBoC based on the previous day's closing price.
The decision - the biggest devaluation of the yuan since 1994 - was taken to avoid a further drop in exports and boost overseas sales by making Chinese products less expensive, after industrial production, investment and retail sales data registered a very weak trend for the month of July.
As stock markets fell and commodity prices tumbled, the devaluation that allowed the yuan to reach its weakest point against the US dollar for almost three years brought many concerns about the Chinese flagging economy and its repercussions on the rest of the world.
The impact of the decision was felt in Europe with importers worrying about the fall in demand from the world's second biggest economy. Among the worst performers there were carmakers, the metal, mining and semiconductor industries, and luxury goods stocks: while BMW fell 2.7%, luxury goods group Swatch and LVMH both weakened by more than 3%; Tiffany (TIF) fell 2.5%; Burberry (BBRYF) stock fell 3.8%, while Prada (PRDSF) sank 4.4% in Hong Kong.
One of the main concerns of the last few days was if other countries will soon follow China's decision and if the devaluation will start a currency war capable of destabilising the world economy. Yet it will be extremely interesting to follow the next developments in this story to see what kind of repercussions they will have on the word of fashion.
The world's fifth largest luxury market, China's recent slowdown was already a worry for a few companies. A lower yuan means that various commodities will be more expensive for China to import. While analysts highlight that a 2% devaluation is very little to cause real damages, companies such as Salvatore Ferragamo (in the third picture in this post: actress Chen Ran, actress Guan Ying, Leonardo Ferragamo, actress Carina Lau, actress Leung Wing Kei and actress Huang Yi at Ferragamo's Spring/Summer 2012 show, the Ullens Centre for Contemporary Art, Beijing, China) or Prada rely on the purchasing power of Chinese spenders (last year China accounted for 26% of Prada's sales).
The yuan devaluation would therefore impact on luxury and accessible luxury brands as well (after the devaluation Coach (COH) fell by 1.5% in New York), as their products would become slightly more expensive. Chinese travellers faced by a weakened yuan would also find their purchasing power diminished and therefore decide to shop at home rather than abroad.
There is also another side of the fashion coin: the devaluation boosts the local and most aggressive competitors of European companies, but also favours those foreign companies that make their goods in China, such as fast-fashion labels à la H&M who may find production cheaper.
It looks like the next catwalk shows and fashion trends will be influenced by the stock markets, in a nutshell, we may need a financial strategist in the front row rather than a famous actress, a prominent celebrity or a high profile fashion blogger.
A final note: as Chinese president Xi Jinping prepares to visit the US for talks with President Barack Obama in September, the trend of the yuan may also become a hot topic at many fashion weeks, so, remember, some basic knowledge of the financial markets may end up being more important than what you will actually be wearing at the shows.
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