Many U.S. companies deal in dollars with their Chinese suppliers; consequently, the yuan devaluation has no effect.
However, according to Reuters, American manufacturers have already started negotiating with their Chinese suppliers to take advantage of the lower value of the yuan. They can do this because many contracts contain clauses that allow for renegotiation if the currency value moves out of a pre-established range.
And those who sell to Chinese markets may have to absorb lower returns or raise their prices.
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The Big Winners of Yuan Devaluation
Merchants in the clothing, housewares, hardware, furniture and general merchandise sectors—particularly large retailers such as Target, Wal-Mart and Macy’s—can expect lower wholesale prices from suppliers who mainly import goods from China. Business Wire notes that the toy industry in particular stands to gain, as major manufacturers such as Hasbro and Mattel source more than 70 percent of their product from China.
Of course, the biggest winners here are Chinese exporters, at least in the short term. Sina reports that Chinese profit margins for textile exports are expected to increase by two to six percent for every one percent yuan depreciation against the U.S. dollar. However, this may be offset for those Chinese producers that rely heavily on imported raw materials, which are now more expensive to acquire due to the devalued yuan.
Will this mean American consumers are ultimately the big winners in that they can expect lower prices on retail shelves? Maybe, but perhaps not right away, as many orders for the upcoming holiday season were already in retailers’ purchasing systems before the devaluation.
One plus for consumers is the Federal Reserve’s September decision not to raise interest rates, in part out of concerns for global economic turbulence to which the yuan devaluation has contributed, according The Wall Street Journal.
That means the Fed funds rate remains at near zero, which as, CNBC notes, means mortgage rates will stay lower for longer. Interestingly, ABC News reports that Chinese buyers are “snapping up U.S. real estate of all kinds, looking for a safer place to put their money than their own slowing economy.”
The Big Losers of Yuan Devaluation
The biggest losers, according to The Wall Street Journal, may be those companies that have targeted the world’s second largest economy for a good portion of their sales. These include Apple and fast-food retailer Yum brands. Moreover, technology rivals based in China, such as Huawei Technologies, Lenovo and Xiaomi are more cost-competitive in foreign markets with Apple and other American high-tech companies due to the lower value of the yuan.
That said, Motley Fool discounts any negative effects on Apple as relatively insignificant and offset by the fact that its products are primarily manufactured in China. “Longer-term, a cheaper yuan is at least neutral and perhaps better for Apple from a profitability standpoint. That's because it will eventually capture the vast majority of the cost savings that would come from manufacturing in China. (Additionally, a cheaper yuan should encourage stronger economic growth in China, which could boost demand for Apple products in the long run.)”
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As USA Today points out, U.S. companies likely to see earnings decline because of yuan devaluation are now less likely to hire or otherwise expand operations. A continued weakened yuan could also put the brakes on the recent resurgence of “Made in America” manufacturing, CNBC reports. Small businesses, in particular, may find it harder to compete with Chinese companies that can now more easily undercut products that may already have been a little more expensive because of labor costs, but are now more so because of the stronger dollar.
What Does Devaluation Mean For Your Business?
Well, if you aren’t manufacturing in China, don’t compete with Chinese manufacturing and/or don’t sell to Chinese markets, the yuan devaluation probably hasn’t affected your business. At least not yet. There is still some debate what this will mean over the long term for the overall U.S. economy, however. For now, it’s too early to tell.