Business / Economy

Europe sees short-term pressure from depreciation

By Cecily Liu and Zhang Chunyan in London (China Daily) Updated: 2015-08-14 10:48

The renminbi's depreciation will put short-term pressure on European exports, but will not have a long-term impact, European business leaders and experts said.

Rain Newton-Smith, the Confederation of British Industry's director for economics, said: "The 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 United Kingdom's top business lobbying organization.

"Although a depreciation in the renminbi against the 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.

The opinion was echoed by Mike Hawes, chief executive of 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.

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

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

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

"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 opportunities," it said.

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

"They can see the volatility in the market, but having the depreciation now will only make 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. Robert Davis, senior portfolio manager of the Brussels-based NN Investment Partners, said that on the one hand, the renminbi depreciation could be related to the International Monetary Fund's desire to see a more market-based mechanism for calculating the daily "fix" of foreign exchange 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 foreign exchange as an easing measure specifically to improve its competitiveness - possible since recent export data has been so weak.

"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, China is well placed compared with its Asian and emerging market peers and particularly those which are commodity dependent as this is also clearly bearish for commodity pricing," Davis said.

Wang Mingjie in London contributed to this story.

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