Chinese markets will become more attractive to Europeans

European industry insiders and experts said the renminbi's depreciation will not affect the European exporters in the long term, and the Chinese markets will become more attractive for European investors because the renminbi will become cheaper.

The Chinese currency continued to fall on Wednesday after the central bank reformed the exchange rate formation system to better reflect the market.

The central parity rate of renminbi, or yuan, weakened by 1,008 basis points, or 1.6 percent, to 6.3306 against the US dollar, narrowing from Tuesday's 2 percent, according to the China Foreign Exchange Trading System.

Rain Newton-Smith, the Confederation of British Industry's Director for Economics, told China Daily, "This move to allow the renminbi to drop a little could help support Chinese growth, against the backdrop of an unexpectedly sharp fall in the country's exports in July."

The CBI is the UK's top business lobbying organization.

"Although a depreciation in the renminbi against sterling will put pressure on UK exports to China in the short-term, the effect on Chinese growth should be beneficial to UK exporters over the longer term," said Newton-Smith.

This opinion was echoed by Mike Hawes, chief executive from the Society of Motor Manufacturers and Traders. "While the devaluation of the Chinese currency could put pressure on exports in the short-term, the UK automotive industry is in a unique position to tackle any challenges with its diverse, competitive range of products which are exported to more than 100 countries worldwide.

"In the long-term, any boost for the Chinese economy is likely to have a positive effect on exports," Hawes said.

China has developed into a major export destination for UK-built cars. Hawes said, "the country's economic growth, coupled with increasing demand for high-quality British premium vehicles, has seen UK car exports to the country increase seven-fold since 2009."

Jaguar Land Rover said in a statement that the company has a balanced distribution of sales globally. "We maintain a currency hedging program to help manage currency fluctuations for the business."

The company added that "Jaguar Land Rover is also investing in new international plants, including our joint venture in China, to help protect our business from currency fluctuations as well as increase our presence in countries identified as having potential growth opportunities."

François Godement, head of the European Council on Foreign Relations' Asia Program, said the depreciation will make the Chinese market more attractive for European investors because the renminbi will become cheaper for them.

"They can already see the volatility in the market, but having the depreciation now will only make the Chinese investment opportunities more attractive. But in the short term there will be a negative impact for high-end exporters to China," Godement said.

The weaker renminbi makes imports more expensive, and shares fell on concerns about export demand for luxury goods makers.

Shares in Burberry fell 4.4 percent in London on Tuesday. The company has around 100 stores in Chinese mainland, which accounts for about 14 percent of the company's sales.

According to the People's Bank of China, the central bank, this move is to increase the relevance of the daily fixing, which has stayed almost flat in recent months, making it more reflective of market forces.

The International Monetary Fund described the central bank's move as "a welcome step" that allows market forces to have a greater role in determining the exchange rate.

Miranda Carr, head of China Thematic Research at Espirito Santo Investment Bank, says that the Chinese government has made its financial markets more market-mechanism driven, and the devaluation came about as a consequence of market forces.

These pressures include the large capital outflow China experienced, the slowing economy and the rising US dollar.

In addition, Carr said the PBOC is shifting to a more market-based system in order to comply with the IMF's Special Drawing Rights (SDR) requirements.

"This means an end to the previous policy of propping up the currency in order to qualify for the SDR, which was becoming increasingly expensive, leading to further depreciation pressure on renminbi, higher potential capital outflows, and greater competitive threats from Chinese exports and companies," she says.

Robert Davis, senior portfolio Manager of Brussels-based NN Investment Partners, said the impact of the renminbi depreciation for European investors would depend on the motivation behind it.

On the one hand, the renminbi depreciation could be related to the IMF's desire to see a more market-based mechanism for calculating the daily ‘fix' FX level. If this is the case, Davis expects the currency move and its implications to be fairly modest.

At the other extreme, China could be using FX as an easing measure specifically to improve its export competitiveness - possible since recent export data has been so weak.

"I think Chinese policymakers are aware of this and so my expectation at the moment is that the devaluation is related to the IMF/SDR issues and so will be fairly limited. In either case though, on a relative basis China is well placed compared to its Asian and emerging market peers and particularly those which are commodity dependent as this is also clearly bearish for commodity pricing," Davis adds.

Mao Lei, assistant professor of finance at Warwick Business School, said that the depreciation shows that the Chinese government is not giving up on export revenue when it is making its 13th five-year plan, said Mao.

"Though it is not a good long-term solution for the country's slowing growth, to reach a good nominal GDP growth number for 2015 the Chinese government appears to be switching back to its old growth mode. Other emerging countries will feel the pressure," Mao added.

However, foreign tourists to China will get marginal benefits from a cheaper renminbi.

David Higgs, general manager of China Links Travel, says: "the recent Chinese currency depreciation can be added to the conversion with the client, making them aware of the value in resort, however, the currency valuation matters most leading up to the date of travel and what it will be when the client is in resort.

"With the majority of bookings made 3 to 14 months before departure, the key elements of a client's booking focused around what cultures and sightseeing they will experience in resort, currency valuated is not in for forefront of a client's mind at the time of quotation or booking," Higgs said.