china’s economy in a world economy:2010-2015
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China’s Economy in a World Economy:2010-2015. Signalling Cycles and Game Perspectives Patrick McNutt Web: www.patrickmcnutt.com Blog: www.mcnutt.tm.mbs.ac.uk. Game on…. China and its currency…does it need to revalue by 25%? US focus on export-led growth….will the USD fluctuate? - PowerPoint PPT PresentationTRANSCRIPT
China’s Economy in a World China’s Economy in a World Economy:2010-2015Economy:2010-2015
Signalling Cycles and Game PerspectivesSignalling Cycles and Game Perspectives Patrick McNuttPatrick McNutt
Web: Web: www.patrickmcnutt.comBlog: www.mcnutt.tm.mbs.ac.ukBlog: www.mcnutt.tm.mbs.ac.uk
Game on….
China and its currency…does it need to revalue by 25%?US focus on export-led growth….will the USD fluctuate?
FED and Bernanke signals high UN at 10% ..unlikely to raise interest rates before Autumn 2010 and USD strengthensMore and more currencies are ‘captive’ in a yoyo
exchange…Euro/USD - Euro weakens/strengthens as USD strengthens/weakens
Tool of Analysis
• We define a Critical Time Line [CTL] of events
• These are the signals
• We search for an observed pattern in the signals
• We define and identify a signalling cycle at time period t
• We make a prediction for time period t+1
Why a signalling cycle?Why a signalling cycle?
• Financial and economic variables create cyclical patterns (CTL)
• Government policy is necessary but not sufficient
• Government policy is ‘signalled’• Economic policy depends on
policymaker’s commitment (PLT) • Signalling recognises that our economic
system is dynamic
Critical Time Line Analysis(CTL)
• Identify and verify the signals
• Locate into a pattern
• Observe the pattern: action and reaction
• Define Player A and Player B
• Dark strategy on belief and actions
1. China CB Governor raises the issue of the role of US $. Diplomatic language ‘lost in translation’
23 Mar 2009
2. G20 London Summit
2 April 2009
3. BW theme of ‘new protectionism’; FT theme of ‘currency misalignment’.
22 June 2009
4 China signal on ‘normal’ Agenda with exchange rates
5 July 2009
5. Italy and France no to ‘normal’
7 July 2009
6. G20 Italy Summit
8 July 2009
7 Signals that China biggest X than Germany
15 July 20098. China US Strategic Econ Summit
28 July 2009
9. Signals on WS ‘bull’ market
31 July 2009
10. Iron ore reaches $100 tonne spot
2 August 2009
11. IMF on Asian need to M. China signals ‘inflation’
17 August 2009
Critical Timeline March - September 2009: US and China
12. G20 Pittsburg Summit
22 Sept 2009
1. At APEC Meetings signal that China will allow Yuan/RMB revalue in 2010.
14 Nov 2009
2. Economic commentators calling for 25% revaluation
20 Dec 2009
3. At AEA Meeting Bernanke on low interest rates
10 Jan 2010
4 Obama State of Union focus on X but silent on exchange rates
1 Feb 2010
5. OECD/MoodyChina Current Account Surplus $328b
8 Feb 2010
6. Obama meets Dali Lama
19 Feb 2010
7 Obama Time Magazine interview and China must revalue ‘over-heating economy’
22 Feb 20108. Chinese commercial banks increase reserves
20 Feb 2010
9. IMF and 4% inflation target and justifying capital controls
20 Feb 2010
10. Ms Hu Xiaolian on exchange rates
26.July.2010
11. TODAY: any signals??
28.Sept. 2010
Critical Timeline November 2009 - February 2010: US and China
12. G20 Summit South Korea
11-12 November 2010
Signals to Observe in 2010Signals to Observe in 2010
• S&P 500: 40% of revenues from foreign sales• Exponential growth in FDI to EMs and ASLEEP. • EMs and ASLEEP economies v Anglo-Saxon &
US• Creative Industry: Transition from non-
technology to technology & innovation sectors.• Capital flows to EMs increasing to approx $700b
in 2010 from $450b in 2008/2009.• China: both PE and FDI in EMs, ASLEEP.
Paradigm shift in world economy
EMs & ASLEEP economies to account for 50% World trade and 30% World exports by 2015
50% of World’s equity is now outside the US: Shanghai Composite correlates with S&P500.
Trading blocs: only 25% of ASEAN exports go outside the trading bloc
Chinese exports growing by 30% to India, Brazil, Mexico and Indonesia.
Paradigm Shift occuring……….Paradigm Shift occuring……….
ASLEEP economies
Global growth
Global companies
Global markets
X:Trading Blocs
China’s equation 2010-2015: GDP = X + G/Corporate Investment/FDI + C(M)
• China more important source of funds than World Bank in Africa
• China to account for 10% (PPP) World GDP by end of 2010
• FDI in Africa, in Iraqi oilfields, China Unicom + Nitel, ICBC + RSA Standard Bank, China-Singapore Trade Deal 2008, China-Egypt Business Council 2006, Geely Auto/Volvo, BYD….
• China’s main stock index now trades p/e = 31: higher by 50% on S&P500.
• Capital inflows to China » either revalue, accumulate reserves or decrease interest rates
China in 2010: Capital flows and FDI
• Signals from PBC on flexibiltiy on exchange rate
• Revalue Yuan/RMB (most likely in Q4 2010 post-G20 in South Korea)
• Accumulate reserves (unlikely as China has trillions of US dollars in reserves)
• Decrease interest rates (unlikely due to concerns with domestic inflation)
• Chinese Government RMB-Bonds
Commitment to exchange rate targets 2010-2012 Commitment to exchange rate targets 2010-2012 with escape clauses ….why?with escape clauses ….why?
• Global growth will depend on world exports as domestic demand continues to fall.
• China Yuan/RMB is ‘captive’ to other countries exchange rate policies
• EMs and ASLEEP economies will substitute export-led growth for more G
• Beggar-my-neighbour policies emerge: both US and China cannot rely on export-led growth simultaneously
• China needs to increase domestic consumption• China limited on interest rates moves due to capital
inflows
And in conclusion…..
2010 is time period t
Our prognosis is for time period t+1
Concluding with predictions:
• China will signal revaluation in 2010, depending on information on Imports, domestic inflation and FDI and PE.
• Currency fluctuations will continue to depress Q3-Q4 corporate earnings…TNCs (Unilever, P&G, Siemens, Standard Chartered) now receive at least 30% of sales from China, Brazil and India and at least 40-50% if including MENA and 50-60% if including Asia.
• Managed exchange rates or use of SDRs will be on G20 Agenda..Canada [June 2010] or S.Korea [November 2010]
THANK YOU
‘’do not wait for the stream to stop
before crossing it’’