China: The Myth Of A Cheaper RMB Boosting Exports

| About: iShares China (FXI)

We never bought the simplistic story that a cheaper currency on its own boosts exports. Investment implication: don't be fooled!

  1. Significant RMB depreciation since 11th August, 2015

    Since the PBOC abruptly depreciated the yuan by 1.9% on 11th August, 2015, the RMB has fell significantly against many of its major rivals. As of this Friday, 5th August, 2016, the yuan had fallen by 8.6% against the US dollar, by 10% against the euro, and by an amazing 31% against the yen.
  2. Despite this depreciation, FALLING exports!

    Since June of last year, exports have fallen by 6.25%; meanwhile, during the first six months of this year, they fell by 2.1% year on year. The myth suggests that exports should have risen. But they fell.
  3. Textiles exports down

    Highly price-sensitive textiles exports were down by 3.7% in dollar terms during the first half of this year.
  4. Home appliances exports down

    Meanwhile, exports of that other price-sensitive sector, home appliances, fell by an annual 1.1% during the first four months of this year.
  5. But why have exports fallen?

    As we pointed out in our book Trade Myths: How Multinationals Influence Trade Balances, exports consist of inputs, many of which have to be imported/are priced in US dollars. So, take textiles. Their major input is the raw material of cotton, silk, etc.; all of these raw materials are priced in US dollars. Thus, simplistically, China's input cost of raw materials rose by the amount which the RMB sank - by 8.6% over the past year. Besides which, my guess is that the price of raw materials - cotton, silk and the like - must have risen, courtesy of terrible weather impeding harvests. Add to this rising labour costs AND falling productivity of textiles workers, and you see that in reality, the price of China's exports did NOT fall by that simplistic notion of the RMB having fallen by 8.6% against the US dollar. A similar argument applies to home appliances. Major input raw materials are plastics and metals - raw materials which, ultimately, are priced in US dollars. So, at its simplest, prices of metals and plastics have risen by 8.6% in RMB terms over the past year. I do not know whether the dollar costs of these raw materials have risen or fallen, but we can imagine that labour costs must have risen, and that unit labour costs must have risen all the more because of falling productivity. Productivity fell because of falling demand.
  6. Investment implication

    Don't keep falling for this myth that a falling exchange rate boosts exports. Were it that simple...

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