As the Chinese yuan slides, Aussie exporters should look beyond China
On Wednesday, the Chinese yuan was devalued for the second day in a row. The surprise announcements by China's Central Bank and the almost 3% depreciation sparked something of a panic on global markets.
The devaluation makes sense from China's point of view and the IMF welcomed the move, though it was criticised by the US. Its objective is to lower the cost of Chinese goods in the hopes of boosting exports (which fell 8.3% in July) and China's flagging economy.
However, like all currency fluctuations, it is a mixed blessing. China's weaker yuan is great for consumers, as goods imported to Australia (or elsewhere) from China become cheaper. Unfortunately, the news is not so great for companies - such as makers of luxury goods and Australian food producers - which export to China. Their products will be comparatively more expensive than domestically produced goods and therefore less competitive.
The devaluation also indirectly puts jobs at risk. Many foreign companies do a lot of business with China, either selling directly to Chinese consumers, or manufacturing via overseas units that produce income in yuan. The most famous example is Apple, which relies on China to make its iPhone and iPad. A stronger dollar compared to the yuan means any income generated in China loses value as it is repatriated back to US. Similarly, manufacturing in China becomes more expensive for Australian firms operating there, which could lead to lower earnings and ultimately fewer jobs.
For Australian businesses, the unexpected devaluation highlights the fact that while China is Australia's largest trading partner and an extremely important market, it is not immune to shocks and sudden changes, which can have significant negative effects on companies trading with it.
In other words, while the Chinese market is massive and has lot of potential, it should not be seen as the be-all-and-end-all of foreign trading destinations. Companies which have the capacity to do so should be actively looking to spread their risks by trading with a number of different markets in various regions.
As the owner of an international business consultancy that specialises in the Middle East and North Africa, my natural inclination is to encourage clients to investigate the rapidly expanding markets of that region, particularly the wealthy Gulf Cooperation Council (GCC) states, which have plenty of cash, stable currencies and a hunger for the best goods and services that money can buy. But there are plenty of other markets, particularly in Asia that are capable of delivering strong results as well (think Singapore, Malaysia or Japan).
For more on opportunities in different parts of the world, check out the Dearin & Associates blog. For more on current opportunities for food producers in the GCC states, download our new report Opportunities for Australian Food and Agribusiness in the GCC.