Fire going out of China’s dragon economy

The devaluation makes Chinese exports cheaper while also increasing the cost of goods going into the country. Picture: Getty
The devaluation makes Chinese exports cheaper while also increasing the cost of goods going into the country. Picture: Getty
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Scottish exporters rattled over shock move to devalue currency, writes Kristy Dorsey

HAVING maintained growth throughout the downturn, China has become the holy grail of global export markets, but last week’s shock decision to devalue the renminbi has raised a raft of questions about the health of the world’s second-largest economy.

What we worry about is what this means from a global economy point of view

Tommy Cook

The move came less than two weeks after First Minister Nicola Sturgeon’s triumphant return from a trade mission spanning Beijing, Shanghai and Hong Kong, where she claimed “huge success” in bolstering the prospects of more than 50 Scottish companies. Ten of those firms secured partnerships worth a total of £55 million.

They included Calnex, the Linlithgow-based maker of kits for testing mobile phone networks. The agreement with China Mobile could boost the small Scottish firm’s sales by more than £3m during the next three years, but chief executive Tommy Cook admits recent events are “kind of worrying”.

“So far there has been no direct impact on our business, but it is a concern if things don’t stabilise in the next week or so,” he added.

On Friday, Chinese authorities ended a three-day streak of cuts to the reference rate for the renminbi, easing fears that a global currency war could be in the offing. The combined drop – the biggest since China set up its modern foreign exchange system in 1994 – makes Chinese exports cheaper while also increasing the cost of goods going into the country.

This could squeeze profit margins at companies such as the 40 or so Scottish seafood firms selling into China.

Total Scottish food exports smashed through the £1 billion barrier last year, helped in large part by growth markets such as China, where exports were up by a massive 82 per cent to £46m. This was driven by a 92 per cent increase in sales of fish and seafood.

James Withers, chief executive of industry body Scotland Food & Drink (SF&D), said China is a “hugely important market” and has been designated one of the group’s top seven areas for development world-wide. Though not yet among Scotland’s ten most valuable food export markets, China is “heading in that direction”.

“I am cautiously optimistic that it won’t give us a headwind that we can’t deal with,” Withers said.

“We are not competing in commodity markets here. We are exporting into premium markets where price is a factor, but is not the primary driver.”

The whisky industry has already suffered in China, with a 23 per cent fall in direct exports last year.

In addition, exports to Singapore – whisky’s third-biggest market by value – fell by 39 per cent to £200m. The final destination for much of the Scotch shipped from the UK to Singapore is China.

With its increasingly affluent population of more than 1.3 billion people, China has until recently been a growth market for premium liquors. Rosemary Gallagher, head of communications at the Scotch Whisky Association, said the market fundamentals remain unchanged despite current difficulties.

“Direct exports of Scotch whisky to China have grown from under £10m at the start of this century to almost £40m last year,” she said.

“But Chinese government austerity measures and economic slow-down have led to a decline in exports in recent months. We have confidence in the future of the market in the long-term, and will monitor the impact of the likes of currency devaluation.”

For many, the fall in the value of the renminbi is less of a concern that the underlying reasons for devaluation.

China has been the world’s fastest-growing big economy by some distance, but has more recently seen a run of weak economic data. This has raised questions about the potential impact on global trade, with the European Central Bank noting last week its concerns about volatility in Chinese markets.

Engineering giant Weir owns businesses in China that export to other parts of the world, meaning the direct impact of currency devaluation will be negligible. But as the world’s leading supplier of equipment for processing copper, gold and iron, the Glasgow-based group is exposed to declines in industrial activity.

“China is an important source of global demand growth for the markets Weir serves and any potential slow-down in its economy would have an obvious impact on commodities markets in particular,” a spokesman said.

Cook at Calnex has similar concerns: “What we worry about is what this means from a global economy point of view. The companies we are selling to are selling a lot into China, so if they slow down their spending, that will trickle down to us.”

The austerity measures that have already hit sales of Scotch in China are aimed at cleaning up corruption in Communist Party, and have dramatically cut back on the local custom of giving expensive gifts to well-connected officials. After years as the biggest growth market for luxury goods, sales in 2015 are expected to fall.

That equates to a double whammy for exporters of luxury goods into China, who along with lower demand must now also choose between putting up their prices or suffering a squeeze on profit margins.

Strathberry of Scotland – which makes handbags and accessories worn by celebrities such as Amy McDonald, Emma Watson and Lily Allen – is developing a wholesale business in China and recently shipped “a few hundred units” to its partner there. Guy Hundleby, Strathberry’s co-founder, says he has not yet seen any impact from last week’s devaluation.

“Time will tell if that changes, but we will still focus on developing over there,” he said. “It is a massive market for us that is still very important and very exciting.”