Europe’s tourism industry is likely to be collateral damage, at least to an extent, in the ongoing Sino-American trade tensions. The biggest factor is the sliding yuan. In late May the euro was trading at 7.4 yuan, but now that figure has risen to around 7.93. That means that the euro has increased by 7 percent in value against the yuan in just over 70 days.

Sino-American trade tensions are also affecting the bottom line of European businesses

This won’t be catastrophic for European tourism, but it will likely slow down growth in both arrivals and spending in the coming months. European luxury retail is likely to suffer the most, as a significant portion of Chinese tourism spending in Europe comes in the form of Chinese purchases of luxury goods. For example, a weakening yuan was cited by analysts as one driver of Pandora’s recently downgraded profit forecasts.

It’s unfortunate timing given that Europe is experiencing a sort of boom in Chinese travel right now, driven by both the EU-China Tourism Year and a much more favorable exchange rate earlier this year.

The decrease in the value is the result of several major factors. The Renminbi (yuan) is a currency that both floats, like the U.S. Dollar, but also has state controls. While a weaker yuan would no doubt make China’s exports more attractive on the global market, this is likely not the main driver of the decreasing valuation of the yuan.

The current devaluation of the yuan was an expected result given China’s current economic anxieties

Rather, the main driver is likely China’s current economic anxiety. China’s economy is slowing down, although it’s still growing at a very brisk 6.7 percent. Another factor is China’s mounting debt, both corporate and private debt. Some analysts consider China’s massive debt levels a much bigger risk for the overall health of the Chinese economy than a trade war. With Chinese stock markets more bearish and a trade war on top of all of that, a certain level of economic anxiety (and a weaker yuan) is understandable.

It’s rather unfortunate for Europe. The European Union has done nothing to stoke a trade war with China, yet it will still bear at least some of the costs associated with the ongoing disputes. Moreover, there’s not much Europe can do in the short term (if at all) to alleviate these issues.

The good news is that yuan will likely recover, or at least hold its value. The Chinese government has little interest in letting the yuan go into free fall, as one of the state’s key long-term financial goals is turning the yuan into a reliable foreign currency reserve around the world. A weak yuan is detrimental to this goal, and an unstable yuan could be disastrous.


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