News February 8, 2016

Deutsche Bank introduces new exchange rate index for the Renminbi

Deutsche Bank’s China economists Zhiwei Zhang and Li Zeng have developed a new effective exchange rate (EER) index for the Renminbi and an associated set of sector-focused EER indices.

In developing the Deutsche Bank EER index, our economists have adjusted for supply-chain effects to bring a layer of analysis that goes beyond conventional trade-weighted indices. Such an adjustment is particularly important for China, where nearly 30% of imports are destined to be assembled and re-exported.

In comparison to the Bank for International Settlements’ REER index, which has shown an appreciation of 31% for China since 2010, the Deutsche Bank index indicates more modest appreciation of 19%. Variation across sectors is also apparent. For instance, appreciation is 35% for the auto sector (where processing trade is estimated at 8.5%) but only 10% for the computer sector, where the share of processing trade is estimated at 75%.

Analysis of this nature shows that China’s loss of competitiveness from currency appreciation is more modest than assumed, as reflected by the nation’s robust market share in trade.

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