China’s Currency Devaluation: A Manufacturing Perspective
Beijing’s dramatic devaluation of the Renminbi yesterday changes things for companies using contract manufacturers in China.
That’s the assessment of Ron Keith, executive chairman of Riverwood Solutions, a supply-chain services and operations consultancy.
“I think most China watchers have been expecting the next big stimulus move in China and wondering what form it might take,” said Keith. “We’ve seen rate cuts and reserve cuts lately as well as central government intervention in the public equities market. But the devaluation of the RMB is clearly bringing out the big guns as it has a very broad impact on the economic climate of a nation whose prosperity is so directly tied to exports.”
The key metric to look at, according to Keith, is the Purchasing Managers Index, or PMI, considered to be an indicator of the economic health of the manufacturing sector. The PMI index is based on five indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment.
“China’s manufacturing PMI number has been in steady decline since the RMB was first allowed to float back in the summer of 2005,” said Keith. “Ten years ago China’s PMI fluctuated between 52 and 58, and there was never a point below 50. It’s been almost a five years now since we’ve seen even a 55.”
In 2015, there have been a few months below 50, indicating sector contraction, with the balance of the year being within a rounding error of contraction, Keith noted. “Clearly the Chinese government felt that something major needed to be done to support the manufacturing sector,” he added.
Over the past several years China has been seen by many manufacturers, especially in the electronics sector, as an increasingly expensive place to do business, Keith observed. OEMs have been diversifying their manufacturing investment to India, Vietnam, Thailand, Romania, and Mexico to offset rising costs, and rising concentration risk in China.
“The devaluation of the RMB to a value not seen in almost three years will certainly influence this trend around the margins of incremental non-China investment,” said Keith. “This move creates the logical question among business leaders as to whether this move is one-and-done or potentially the beginning of a larger policy shift.”