What Does China’s Currency Devaluation Really Mean for Luxury?

August 17, 2015/0/0
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Last week was a tumultuous one for international markets and the luxury industry. China’s unexpected announcement of a “one-off” devaluation of the Renminbi (RMB) — which actually happened twice — stunned markets, with shares falling across the globe. However, it was arguably those in the luxury sector that were hit the hardest, with firms such as LVMH and Burberry recording a sharp drop.

In rare form, China issued a message to reassure investors and quickly intervened in the market, largely returning calm. But the question raised last week remains: what’s behind this devaluation, and can we expect more turmoil for luxury?

While China continues to grow at a pace that most countries would envy, that growth has clearly slowed. Many private economists believe China will struggle to meet its internal goal of 7 percent growth in 2015, most likely ending the year in the 5-6 percent range. It is this slower growth that is the most likely culprit behind the devaluation.

Contrary to common perception, more than half of China’s growth has not been export-driven but has instead come from investment, with one crucial sector being real estate. With the country’s real estate market in the doldrums, it is only logical that investors have pulled back. Investment has fallen markedly in the past 12 months, and there are indications that demand for labor is also falling. At the same time, there have been massive capital outflows from China, with scores of mainland Chinese purchasing homes in London, Los Angeles, and New York and reallocating assets out of RMB.

Could we see further weakness in the RMB? Perhaps, but expect it to be controlled. This brings up a second question: have markets overreacted?

After all, the net correction was only 3 percent. Looking at the RMB in the context of other currencies, it is 30 percent stronger against the Euro compared to last year, and 10 percent stronger against the currencies of its regional partners. (A fact that has driven a leap in luxury sales to Chinese tourists in Japan this year.) With Chinese buyers making more than 80 percent of luxury purchases overseas, the impact of currency adjustment so far remains negligible.

Although the easy years for the luxury industry are over, there remains immense room for growth. While domestic Chinese demand has fallen, outbound tourism and spending continues to soar, with overseas travel up more than 12 percent in the first half of the year. By the same token, e- and particularly m-commerce continues to expand rapidly. China Luxury Advisors has always taken the position that engaging with the Chinese consumer is a global effort serving a global consumer — not a geographical one limited to mainland China or even Greater China.

Now, more than ever, brands need to make strategic — not tactical — investments in attracting and engaging traveling customers. At the same time, luxury brands, long the laggards in terms of technological adoption, also need to invest in technology to bring their customer experience in line with Chinese expectations. Regardless of the current turmoil, it will be the brands that are the most nimble and responsive that will be the best positioned to thrive.