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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?
FED and Bernanke signals high UN at 10% ..unlikely to raise interest
rates before Autumn 2010 and USD strengthens
More 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?
• 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
Critical Timeline March - September 2009:
US and China
23 Mar 2009
1. China CB Governor
raises the issue of the
role of US $.
Diplomatic language
‘lost in translation’
22 June 2009
7 July 2009
3. BW theme
of ‘new
protectionism’
; FT theme of
‘currency
misalignment’
.
5. Italy and
France no to
‘normal’
17 August 2009
28 July 2009
15 July 2009
7 Signals that
China biggest X
than Germany
8. China US
Strategic Econ
Summit
11. IMF on
Asian need to
M. China
signals
‘inflation’
12. G20 Pittsburg
Summit
2. G20 London Summit
4 China signal on
‘normal’ Agenda
with exchange
rates
22 Sept 2009
6. G20 Italy
Summit
8 July 2009
9. Signals on WS
‘bull’ market
2 April 2009
5 July 2009
31 July 2009
10. Iron ore
reaches $100
tonne spot
2 August 2009
Critical Timeline November 2009 - February 2010:
US and China
14 Nov 2009
1. At APEC Meetings
signal that China will
allow Yuan/RMB
revalue in 2010.
10 Jan 2010
3. At AEA
Meeting
Bernanke on
low interest
rates
8 Feb 2010
5.
OECD/Moody
China Current
Account
Surplus
$328b
28.Sept. 2010
20 Feb 2010
22 Feb 2010
7 Obama Time
Magazine
interview and
China must
revalue ‘overheating
economy’
8. Chinese
commercial
banks increase
reserves
11. TODAY:
any signals??
12. G20 Summit
South Korea
2. Economic commentators
calling for 25% revaluation
4 Obama State of
Union focus on X
but silent on
exchange rates
20 Dec 2009
1 Feb 2010
6. Obama meets
Dali Lama
19 Feb 2010
9. IMF and 4%
inflation target
and justifying
capital controls
20 Feb 2010
11-12 November
2010
10. Ms Hu
Xiaolian on
exchange rates
26.July.2010
Signals 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 nontechnology 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……….
Global markets
ASLEEP
economies
X:Trading
Blocs
Global growth
Global
companies
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
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’’