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[FRANKFURT] European exporters glimpsed the possible progressive erosion of lucrative benefits from the weak euro on Tuesday, as China's surprise devaluation made foreign goods more expensive for its consumers and corporate customers.
Shares fell in makers of cars, luxury goods and consumer products, wiping 140 billion euros (S$216.8 billion) off the value of the FTSEurofirst 300 index, as the spectre loomed of a new round of currency wars.
European companies from L'Oreal to Siemens have benefited from the euro's weakness making their products cheaper abroad and lifting the value of sales in other currencies, while Chinese growth has masked weakness elsewhere.
China is the second-biggest buyer of EU goods after the United States, accounting for 14 per cent of exports from the trade bloc last year, according to Eurostat.
The Chinese central bank's 2 per cent cut in its official dollar-to-yuan guidance rate sparked fears of more such moves to come and gave support to concerns the world's second-biggest economy would miss its 7 per cent growth target for this year. "The biggest impact is what this says about Chinese growth,"said Liberum consumer goods analyst Robert Waldschmidt. "When you look at the actual companies, clearly anyone that's exporting to China is going to have a harder time." Sectors with the highest exposure are basic resources, personal and household goods, technology, chemicals and autos.
The European basic resources index, already down 16 per cent in the past three months, fell a further 4.1 per cent; the autos index fell 4.1 per cent and the personal and household goods index slid 2.4 per cent.
The exporter-heavy German blue-chip DAX fell 2.7 per cent, with automakers Daimler, BMW and Volkswagen leading the way as China's car industry association reported the biggest monthly drop in vehicle sales in 2-1/2 years, even before any devaluation impact. "The rotation out of exporters to more domestically focused stocks and sectors, in Italy or Spain for example, has more to go," said Dennis Rose, a strategist at Barclays in London.
Evercore autos analyst Arndt Ellinghorst said the 2 per cent devaluation would not be material for German carmakers, with zero impact this year thanks to hedging and an operating profit impact of around 1 per cent next year.
But Juergen Hackenberg, head of European equities at German asset manager Union Investment, said: "A continual weakening would have clear effects on companies strong in exports." Perhaps more significant than currency translation effects is the signal sent by China of its determination to support its export-dependent industrial sector, where it is building national champions to challenge Western rivals, analysts say. "The timing certainly aligns with current efforts to further prop up growth in non-financial sectors," wrote IHS Global Insight China economist Brian Jackson.
China has already produced global telecoms equipment maker Huawei and has created the world's biggest rail conglomerate, CRRC, by merging two trainmakers.
Analyst David Vos of Barclays said cheaper export prices would not always benefit Chinese companies as often they did not yet have comparable technology to that of Western rivals.
But he saw large infrastructure, power transmission and coal power generation and makers of low-end mining equipment, such as crushers and grinders, as sectors where China was competitive. "Move up a little bit further and you can start thinking about medical equipment, where we have been very cautious about the Chinese domestic landscape for Philips and Siemens, but this increases the attractiveness for domestic players to start to export," he said.
State-sponsored Huawei is already neck and neck with Sweden's Ericsson in telecoms equipment and analyst Sylvain Fabre at Gartner said the devaluation could further strengthen its hand and that of peer ZTE.
But he noted Huawei had long ago abandoned the cut-throat pricing strategy it used to conquer world markets and that in any case international tenders were made in dollars. "Huawei has been disciplined on price in recent years, and even ZTE is not in total price-war mode. There are lots of things that come into play, not just currency," he said. "What is true is that the Chinese vendors will have the ability to cut price a bit more if they so choose."