Yuan Depreciation Likely to Give Positive Long Term Results
The depreciation of the yuan last week strike fear that European exports to China might be affected as the Euro and pound strengthened, showing concerns that companies selling goods to the second largest economy will see their trading margins shrink. But the scene will unlikely play out in the long term as the yuan has become a major global currency. The Central Bank and People’s Bank of China decided to reform the exchange rate mechanism to reflect the yuan strength better against the US dollar.
The International Monetary Fund said that the move will allow a greater role for market forces in the yuan a welcoming step and will certainly raise prospects for the yuan to join the IMF Special Drawing Rights currency basket that consists of the Euro, pound, US Dollar and the Japanese Yen. In the past years Frankfurt, Paris and London vied to become the main trading point for any offshore yuan payments. One in five companies in invoice in yuan and 80 percent of non yuan users want to switch to the currency for invoicing. And according to Frankfurt Main Finance at a global level the yuan payments may increase in value by 29 percent in March.
The Chinese central bank promised to add more foreign exchange reforms in the lines of market orientation to produce greater opportunities for Europe main financial centers. Basically the weaker yuan will boost struggling exporters, as their products will become cheaper for overseas buyers, meaning foreign goods will become more expensive for Chinese consumers and high quality European products will not suffer. Chinese consumers are starting to be more affluent and will continue to purchase brands they respect and trust. Analysts said challenges that face luxury labels would count on Chinese shoppers to boost their sales and increase profit margins.
Luxury brand consumption surge in the past four years at a rate of 16 to 20 percent annually even with the depreciation of the yuan and demand of these products are staying strong. The rise of e-commerce helped fuel the demand from Chinese consumers that have refused to compromise on cheaper alternatives and purchasing slightly higher items will not dent their enthusiasm.