How China’s currency devaluation could raise prices in the U.S.
China devalued its currency for the third consecutive day Thursday, a drop of 1.1% from Wednesday and collectively the largest drop in decades. The devaluation has caused turmoil in markets all over the world this past week due to fears of a global trade imbalance and currency wars.
But while the naysayers may be overstating the case, it’s worth noting that China’s currency devaluation doesn’t just have a macroeconomic impact but could also affect the everyday lives of average Americans, from the cost of entertainment to the price of milk. While prices in the U.S. may fluctuate for a number of reasons, they could also be impacted by currency movements in China.
Here’s how this could happen.
When the Chinese yuan is devalued, it costs a Chinese consumer more in the local currency to buy an American product or service since each yuan now buys fewer dollars. But even though the price has gone up, local wages remain the same, making it more difficult for the Chinese consumer to make the purchase.
Take a company like Netflix (NFLX) as one example, which is gearing up to enter the Chinese market. To compete with local streaming services, including a new venture by Chinese ecommerce giant Alibaba (BABA), the company will have to offer competitive pricing to attract subscribers, putting pressure on its margins in China. This impact is worsened by a weaker yuan, which would effectively make Netflix more expensive for local viewers and force the company to lower prices even further to gain traction.
Lower profitability from China might then require Netflix to raise its prices in the U.S. to boost its bottom line. But higher pricing could also lead to a loss in subscribers, which would result in analysts downgrading their projections for the streaming video provider. That would depress the stock price.
Now consider the owner of a company that provides machine parts for a milk processing plant, and who likes to watch Netflix. While the owner, who makes $200,000 a year, may not care about a $1 per month increase in his online entertainment costs, he would care about a decrease in the value of his mutual fund that holds Netflix stock, which could amount to thousands of dollars. To make up for this loss, he in turn would have to raise the prices of his machine parts, which would then make it necessary for the company providing milk to increase its prices.
And that’s how the currency devaluation in China can ripple through the global economic ecosystem to ultimately impact not just how much you pay to watch House of Cards, but the price of a gallon of milk on your local supermarket shelf.
Obviously, this is a simplistic example and a myriad of unpredictable factors could change the outcome. In the above scenario, the milk processing plant could simply buy its machine parts from China to take advantage of a weaker yuan. In addition, the effects of foreign exchange fluctuations are usually slow to spread through the wider economy, and in itself are subject to other influences such as supply and demand. Cheaper Chinese exports would lead to a higher demand for the yuan, which would cause it to rise back up in value over time and enable Netflix to normalize its pricing.
But the collective impact of several such scenarios definitely can make a difference and that’s what American consumers should be worried about.
Kumar is a tech and business commentator. He has worked in technology, media, and telecom investment banking. He does not own any shares of the companies mentioned in this article.