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.

The full report is available in the download area.