Luxury brands are likely to feel the pain of devalued yuan

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Last week, the Chinese central bank devalued the yuan by another two per cent. This is especially bad news for Western luxury brands that have relied heavily on the country’s expanding wealth for growth in recent years.

Shares of several luxury brands, including those of Porsche, Christian Dior, and Burberry, have already taken a hit because of this update. The devalued yuan is also set to further drive up prices on foreign goods in China, and will likely slow travel to popular shopping spots, including Japan, France and the U.S.

Winston Chesterfield, associate director at Wealth-X, suggests that the severity of these effects will depend on the depth of the devaluation. “Vast swathes of China’s luxury shoppers currently shop overseas,” he says. “China itself is only the fifth biggest luxury market, but its value-seeking consumers overseas’ spending powers the Chinese further up the league.”

Continues Chesterfield, “We know from this that prices of luxury goods do matter to Chinese luxury shoppers. A weaker yuan will hit their buying power and inevitably have some effect on buying, but the question is whether a small percentage reduction (under 5 percent) will make much difference.”

As of now, many brands hope that this reduction won’t impact greatly. However, the possibility remains that the People’s Bank of China could devalue the currency even further. CJ

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