TAIPEI, Taiwan (TheStreet) -- China's move this week to depreciate its ominously stable currency for the first time in more than two decades will raise costs for global companies that import goods into the massive market.
The central bank raised the U.S. dollar-Chinese yuan mid-price fixing to 6.2298 from 6.1162 on Tuesday, causing a sudden yuan devaluation of about 2%. The People's Bank of China made its decision this week in view of a strong dollar and to further Beijing's mission of letting free markets, rather than the Communist government, chart a course for the $10 trillion-plus economy. Later the yuan will be allowed to fluctuate according to world currency supply and demand.
Foreign companies that export goods to China will lose money as they convert yuan proceeds back into foreign currencies. Among the exporters are luxury brands such as cosmetics maker Estee Lauder (EL - Get Report) and General Mills (GIS - Get Report), which sells flour, snacks and soups to China. LVMH, (LVMUY), the huge luxury goods maker, as well as Starbucks, (SBUX - Get Report) which imports coffee beans are also likely to be hit. Apple (AAPL - Get Report), in turn, may be hurt by China's slowing demand for consumer goods.
Conversely, Chinese exporters, including Nasdaq-listed names such as Haier Electronics Group (HRELF) and IT hardware developer Lenovo (LNVGY), will gain when they exchange foreign currency earnings for yuan at home. (U.S. dollar-denominated raw material prices may rise, however, affecting export production at Chinese factories.)
Exports from China, Asia's giant manufacturing hub, declined 0.6% year-on-year in the first seven months of 2015, a result of overseas demand and as rivals such as Vietnam see their currencies depreciate.
"I think the decision was based purely with exports and the country's competitiveness in mind," said Nitin Dialdas, chief investment officer with Hong Kong fund manager Mandarin Capital. "Asian currencies have largely been depreciating over the last six months, so China needed to do something to remain competitive against them.
"The flip side is that, yes, it will hurt importers and it will potentially hurt domestic consumption as imported goods have just become a couple percent more expensive," Dialdas said.
The weaker yuan will particularly hurt the revenue of European companies as they already face relatively weak demand from China, said Alicia Garcia-Herrero, chief Asia-Pacific economist with French investment bank Natixis. One European firm to watch would be Carrefour (CRRFY), a Nasdaq-traded French retailer with some 200 stores in China.
Chinese purchasing power and consumer prices will also ease with the currency depreciation, M&G Investments said in a research note Tuesday. Both trends would further hurt foreign exporters to China.
On the upside for foreign markets, a weaker yuan could "be bullish for US treasuries" and lead to lower yields, M&G adds. If the yuan depreciates in value, according to M&G's note, China will have more dollars to invest in U.S. treasuries through foreign reserve accumulation.
Until the impact of depreciation is priced into the world economy, expect volatility.
"While China's policy makers have long suggested that forex reforms would happen, the abrupt nature of (Tuesday's) announcement has injected considerable volatility into the RMB and other Asian currencies," investment bank HSBC said in a research note.