China today devalued its currency by 1.9% against the US dollar, the biggest drop since the country aligned its market and official rates.
The People’s Bank of China said “Since China’s trade in goods continues to post relatively large surpluses, the yuan’s real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations. Therefore, it is necessary to further improve the yuan’s midpoint pricing to meet the needs of the market.”
Translating this from Banker-Speak, we believe it means something like “Recent economic data has been really ugly, but if we drop the yuan against the dollar, exports will go up, imports will go down, and the export-focused economic engine that has driven our growth for decades will stop sputtering and rev up again.”
Fair enough. But what, if any, impact will the move have on the air freight industry?
On Day One of the devaluation, the impact on the air freight industry as a whole is a matter for speculation, but there is no need to speculate about its impact on China’s big airlines. That impact was felt within minutes of the announcement, and by the end of the trading day, the market value of Air China, China Southern, and China Eastern had fallen off a cliff as investors acted on concern that the devaluation would increase the size of the carriers’ dollar-denominated debt. China Southern led the slide, with its share price on the Hong Kong exchange tumbling 18%.
As for the air freight industry, the effect of a 2% drop in the yuan against the dollar may not be all that significant. Yes, Chinese-manufactured goods will be a little cheaper for consumers in the rest of the world, so exports should rise a bit, generating some increase in ex-China air freight. On the other hand, Chinese consumption of goods produced in the rest of the world – consumption which had been steadily rising in recent years – will likely fall a bit.
We shall see.