Chicago, August 28

US retailers including Toys R Us are starting to negotiate with their Chinese suppliers to take advantage of lower manufacturing costs after China devalued the yuan, with many saying they want to be ready if currencies in China and other Asian countries drop more against the dollar.

Earlier this month, China devalued its tightly controlled currency in an effort to boost growth and help flagging exports. The nearly two per cent cut on August 11, the most significant downward adjustment to the yuan since 1994, will make imports from China cheaper. The Chinese currency is down 3.2 per cent versus the dollar so far this year.

The cheaper yuan offers the chance for retailers to buy more with dollars, with a knock-on effect in other supplier nations eager to remain competitive. After China’s move, Vietnam devalued the dong by one per cent while the Malaysian ringgit dropped to a 17-year low, its largest one-day loss in almost two decades.

“Most US retailers have dollar-denominated annual contracts with provisions that allow them to renegotiate if the currency moves outside of a pre-established range,” said Giuliano Iannaccone, chair of Tarter, Krinsky & Drogin LLP’s international and retail practice group.

Some retailers will reap benefits immediately by exercising those clauses while others expect to enter next year’s contracts with a stronger bargaining position, he said.

“We are already engaging with our suppliers,” a senior official from Toys R Us who spoke on condition of anonymity told Reuters. The company has dollar-denominated contracts and expects to benefit, the person said.

“The bigger question is what’s next from China and how will that impact other countries where we procure from?”

Toys R Us procures toys and baby products such as strollers from China, the Philippines, Malaysia and Japan among other Asian countries and expects any potential future devaluations in China or other countries to prove beneficial.

Best Buy Co Inc Chief Executive Hubert Joly said China is a big supplier, with contracts in place for the rest of the year. “We annually review vendor agreements in the fall.. and expect benefits from the devaluation when those talks begin,” he said.

Home Depot Inc Chief Financial Officer Carol Tome said the company has identified potential cost benefits since the China devaluation and will pursue them. Home Depot procures products including lighting, fixtures, fans, bath accessories, hardware and tools from the country.

Steve Preston, chief executive of trade consulting firm Livingston International said it will not be surprising if China continues to devalue its currency to boost their exports, forcing other countries to follow suit.

“The currencies of all our big trading partners other than China have become substantially cheaper and if they continue to become more attractive businesses will start changing their buying patterns,” Preston said.