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Can luxury brands afford a devalued yuan?

As China's central bank devalues the country's currency for the second time in two days, one sector is expected to be hit the hardest: luxury.

Luxury brands worldwide not only have to worry about China's anti-corruption drive, but now, how they're going to have to rethink their imports for the country.

Natalie Behring | Bloomberg | Getty Images

The markets are already showing these signs of struggles. High-end European brands like Hermes International, Porsche, Christian Dior and Burberry were all trading sharply down during today's trade.

Already European luxury goods are having to revisit global pricing strategies because of other volatile currencies such as the strong dollar and pound. Analysts are now saying the price differentials are set to worsen when it comes to China.

Will luxury brands flee from China?

Fflur Roberts, head of luxury goods at Euromonitor International, told CNBC via email that the latest currency issue could "further amplify the luxury price differentiation" between Asia and Europe.

"In some cases, the cost of the same luxury brand is now 50 percent higher in China than it is in western Europe," she told CNBC.

"Inevitably, such price disparity has encouraged opportunists to buy up popular items in Europe, in bulk, and resell them in China at well below formal retail prices."


This "grey market" is also disrupting luxury goods business into China.

"Some industry insiders believe that up to 40 percent of actual luxury goods consumption in China is now coming from the grey market (most experts believe it's fuelling at least 20 percent)," Roberts added.

"What we know is that the grey market is growing, forcing luxury brands to take radical action on narrowing these differentials, including hiking prices elsewhere and dropping them in China. However with the new currency issues in China this may no longer be possible for international brands."

Time for a rethink?

President Xi Jinping's crackdown on ostentatious gift giving; sales of luxury timepieces and spirits have been "the biggest casualties", but the high-end market overall has been impacted, triggering a trend toward "more understated luxury."

"The latest currency issues now facing the country could make this situation worse, encouraging the grey market further but also making the trend of shopping for luxury abroad even more attractive owing to its affordability."

However, Winston Chesterfield, associate director at Wealth-X, told CNBC it depends on the depth of the devaluation.

"Vast swathes of China's luxury shoppers currently shop overseas, or purchase through daigous ("agents" who source goods from markets outside China), for lower prices. China itself is only the 'fifth biggest luxury market' (Deloitte) but its value-seeking consumers overseas' spending powers the Chinese further up the league," Chesterfield said.

"We know from this that prices of luxury goods do matter to Chinese luxury shoppers. A weaker yuan will hit their buying power and inevitably have some effect on buying, but the question is whether a small percentage reduction (under 5 percent) will make much difference," adding that many brands hope it won't impact greatly, but the People's Bank of China could devalue the currency even further.

Are all luxury brands pricing it in?

Despite the anti-corruption drive and market volatility, some luxury brands still remained positive on China. Prior to the devaluation, both high-end drinks maker, Campari, and upmarket notebook maker, Moleskine, told CNBC that they remained positive in gaining popularity in China.

Even affordable luxury brand, Pandora, didn't feel downbeat, reporting earnings ahead of the second devaluation.

Pandora Group's CEO, Anders Colding Friis, told CNBC Tuesday, they were happy with their performance in Asia and said they would continue with their expansion plans in China.

"We see very good reception of Pandora in China and we expect to continue our roll out, opening around 20 stores in China during the rest of 2015."

However, Chesterfield, told CNBC that luxury brands have "recognized the risks with China" as the political system and turbocharged economy has shown a very significant effect on growth and decline, allowing companies to rework their strategies.

More doom and gloom to come?

Is it time to sell stocks with high Chinese exposure? Boris Schlossberg, managing director at BK Asset Management, told CNBC Wednesday that he would say so; however it may be "too late."

"I don't think this is a tiny one off event, I think this is the beginning of a cyclical decline in Chinese demand as they have to correct a lot of the imbalances in the economy. The pain is probably going to last a lot longer than a couple of months."

—By CNBC's Alexandra Gibbs, follow her on Twitter @AlexGibbsy.