Ti is pleased to announce a new feature to add to our extensive Logistics Briefing industry coverage. Each month Ti’s team of analysts will highlight a topical chart from our Ti Dashboard and provide you with our unique commentary and analysis.
August Chart of the month: China’s devaluation and what exchange rate movements mean for logistics providers
China’s devaluation of its currency has garnered plenty of interest over the past month. However it is important to take stock of the longer term picture.
The graph above, accessible on the Ti Dashboard, displays five trade-weighted exchange rate indices. A country’s trade-weighted exchange rate index measures the movement of the value of a country’s currency over time, but against lots of countries rather than just one, with each country’s weight determined by the level of trade between countries.
An increase in the index score equates to an appreciation (increase in value) of the currency, which will reduce a country’s cost of imports but undermine the competitiveness of its exports, making them more expensive. The opposite is true for a decrease in the index score. Therefore the index can be particularly useful to freight forwarders seeking to understand why a country’s import and export flows may be changing.
Note that the graph displays monthly data from January 2010 to July 2015, with August data not available at the time of writing. Given China’s devaluation in August, the grey line on the graph will will drop from its level of around 130, to at worst, probably somewhere in the range of 120 to 125. But over the longer run, it is clear that the value of China’s currency has been on a steadily upward trajectory, and has increased from its average index value of 100 in 2010 to a high of 132 in July 2015, a 32% appreciation in value. If you look further back, as Economist Paul Krugman does in a recent blog, the appreciation is 55% when comparing July 2015 to July 2005. The point is, the recent devaluation is small compared to the overall change of the past 10 years.
So how has China managed to have such strong export growth over the past decade in spite of exchange rate movements undermining its competitiveness? Other things also determine international competitiveness, such as quality of infrastructure, the costs of doing business, tax rates and productivity. While improvement in some of these factors, especially productivity, helped maintain China’s competitiveness for a time, it is clear that over the last few years as the rate of exchange rate appreciation has increased, China’s competitiveness has decreased, pushing down its export growth.
As a final aside, the graph can also be useful as an aid to understanding financials of global LSPs. For instance, a number of providers (such as DP DHL) that report in euros have recently published their first half 2015 results, and have stated that their year-on-year revenue growth has been flattered by currency movements. A quick check of the graph shows that the euro index is considerably lower in the first half of 2015 compared to the same period in 2014, clearly illustrating the impact of currency movements. For global providers that report in dollars (such as CEVA, whose revenues have been depressed by currency movements), the opposite is true, as the increasing dollar index demonstrates.
Note: All index figures quoted here are ‘real’, meaning that they also account for price movements within economies, as opposed to ‘nominal’ figures which do not take domestic price fluctuations into account and only represent changes in the exchange rate.
To find out more about the Ti Dashboard, the source of Chart of the Month, please contact Holly Francis: [email protected]. Alternatively, to subscribe to the Ti Dashboard for a period of 12 months (priced £795) please see the Transport Intelligence website.