The RMB Devaluation: Is Your Supply Chain Benefitting?

Amid the trade wars and the tariffs, the RMB is weakening against the USD. By the end of January 2018, the rate was 6.2.  On July 11, 2018, the exchange rate was 6.68. As of October 15, 2018, it was 6.92, as pictured below. The question is – can your supply chain benefit from this?

 

The RMB doesn’t float freely against other currencies but it’s controlled by China’s central bank. For years, China’s central bank has been accused of keeping the RMB artificially weak against the dollar to increase exports. However, for the past ten years, the value of the RMB has been steady, pegged to the US dollar, only to increase recently.   The official reason is that the Chinese government has now pegged the RMB to a basket of currencies, instead of just the US dollar.

 

So, what does this mean for importers? The higher the RMB amount per USD, the more competitive China is for importers.  The reason is that, as the RMB gets “weaker” all RMB related costs, such as labor,stay the same in China, but are cheaper in USD.

 

For example, say a gizmo costs RMB 6.2 to make in China, and the seller charges $1.00 FOB. A year later, if the cost is unchanged, theexchange rate is 10% higher (i.e. RMB 6.88 to $1.00), andthe China seller still charges $1, they actually wouldmake 10% more than before, even though the price to the importer is the same.  They could adjust their USD cost downto $0.90 and make the same amount of profit.

 

The RMB is currently valued at 6.92 to the dollar. According to thisarticle, the current RMB value is nearly identical to its value ten years ago, in September 2008, and 10% more than what it was in January 2018. Does that mean your China imports should be 10% cheaper? Not necessarily. Depending on circumstances, the shift of the RMB value could create an opportunity for importers to get discounts from their suppliers – or it could make no difference at all.

 

Most China-sourced products are a combination of domestic (i.e. RMB) related costs and imports. If the RMB content of a product is low, then the potential savings will be low, butif a product is 100% from China, thena 10% drop in the RMB valueshould translate into 10% discount.

 

Smart phones, which account for a huge percentage of US imports from China, are another example:companies like Apple wouldn’t be affected much by RMB devaluation because most of the raw materials for the iPhonecome from outside of China. Assembly cost in China is about 2% of the total cost of the product—a 10% savings on that is insignificant, according to thisarticle from the Wall Street Journal.

 

This said, the RMB weakening can make it easier to absorb the costs of imposed tariffs. Imposition of tariffs often causes suppliers to reduce their price to keep their clients anyway. If the currency allows 10% savings on your products in China, this may help offset costs of tariffs.

 

In what ways is the devaluation of the RMB affecting your supply chain?  Tell us in the comments below!

 

By Jocelyn Trigueros

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