Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Financial Signals: China & the RMB Game Perspectives - Relevance for MENA/GCC Patrick McNutt, FRSA Web: www.patrickmcnutt.com Why a signalling cycle? • Financial and economic variables create cyclical patterns (CTL) • Government policy is necessary but not sufficient: it is signalled in advance of action • Emerging sub-games • Economic policy depends on policymaker’s commitment (PLT) • Signalling recognises that our economic system is dynamic Emerging signals: sub-game • China’s RMB signals from Q3:2010 depend on information on domestic inflation targets. • Currency fluctuations continue to depress 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 5060% if including Asia. • Managed exchange rates or use of SDRs on G20 Agenda..Canada [June 2010] or S.Korea [November 2010] Game on….yoyo exchange rates 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 and USD strengthens More and more currencies are ‘captive’ in a yoyo exchange…Euro/USD - Euro weakens/strengthens as USD strengthens/weakens..US$ peg Critical Time Line Analysis(CTL) • • • • Identify and verify the signals Create a critical time line CTL Observe the pattern: action and reaction Define Player A and Player B..is there Player C? Truthful revelation • Dark strategy on belief and actions CTL: November 2009 - October 2010: observe a pattern 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 $328b 30 Sept . 2010 24 Feb 2010 22 Feb 2010 7 Obama Time Magazine interview and China must revalue ‘overheating economy’ 8. Chinese commercial banks increase reserves 11. US Congress Bill on tariffs 12. Brazil Minister Mantega: Plaza 2 2. Economic commentators calling for 25% revaluation 4 Obama State of Union focus on X but silent on exchange rates 20 Dec 2009 1 Feb 2010 6. Obama meets Dali Lama 19 Feb 2010 8 Oct 2010 9. IMF and 4% inflation target and justifying capital controls 20-25 Feb 2010 10. G20 Canada Summit Toronto 26-27 June.2010 CTL: January 2011 to 2012 memory & belief 1 Jan 2011 1. MEMORY IN THE GAME 2009-2010 BW focus on Gini for China = 0.5 8 Feb 2011 22 Nov 2011 5. ECB says No to Eurobonds 3. PBC increases interest rates to 6.06% dd.mm. 2012 12 Feb 2012 22 Feb 2012 7 IMF Report on importance of EU trade t o China 8. Chinese Wen Jiabao: China ready to solve EU debt crisis 11. TODAY 1 Time Period t 12. TODAY 2 Time Period t 2. China relaxes currency laws 4 RMB strengthens to 6.37 v US$ 6. Xinhua News agency: Germany should do more dd.mm.2012 9. V-President Jinping China ‘will help; in Dublin 8 Jan 2012 12 Jan 2011 1 Sept 2011 21 Feb 2012 10. PBC Report on more open financial system 23.Feb.2012 Observations in 2010 • S&P 500: 40% of revenues from foreign sales • Exponential growth in FDI to EMs and ASLEEP. • EMs and ASLEEP economies [inc Africa, MENA (GCC)] v Anglo-Saxon & US • Creative Industry: Transition from nontechnology to technology & innovation sectors. • Capital flows to EMs increasing from a base of $450b in 2008. • China: both PE and FDI in EMs, ASLEEP. Observations in 2011 • 28-30 March 2011 Yen rises to 76 v US$ and G7 intervene..falls back to 81 • G20 Feb 2011 Meeting France (Brazil, Canada, Australia, France)…no signals on exchange rates or international capital flows. • ECB Trichet ends term, Draghi appointed: new dove signalling on (reduced) interest rates. • US Congress equation: China’s currency practices = lost jobs in US • German bond yields come under threat in 2011. Observations in 2012 • EU cannot fix debt crisis unless it fixes the banks • China-MENA [GCC] FDI • GCC issues: US$ peg and/or monetary union • Arab spring effect • Bank debt ‘crowd-in’ sovereign debt: role of SWFs • ‘Derived impact’ of FDI • MENA [oil & gas exporters] 75R:70X; world supply 70 [oil] 50 [gas] • Diversify New Geo-political order • Emerging markets: young population, technology transfer, creative industries, and FOREX reserves: EMs, GCC, ASEAN and BRIC • More FOREX of US $. Non-dollar Assets and the role • EMs’ Equity markets: High P/E due to high GDP growth. • Future economics of Africa: 2.7% world output 2011 Paradigm Shift occuring………. Global markets ASLEEP economies X:Trading Blocs Global growth Global companies China’s equation: GDP = X + G/Corporate Investment/FDI + C(M) • China more important source of FDI funds than World Bank in Africa • China to account for 10% (PPP) World GDP by end of 2012 • 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 • 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 EU: avoid debt-deflation Second-best solution • Deposits migrate across Member States • Moral hazard with ESM ‘permanent rescue’ • Indicators of ‘black economy’ activity and structural unemployment • Increased savings (paradoxically) with credit card indebtedness. Template solution • Pan-European solution that supports the Euro as an international reserve currency • Liquidity support for RMB • Avoids a debt-deflation cycle embedding into EU’s real economy • Process: Increased role for GCC SWFs ‘Thief of Nature’ solution EU debtdeflation China’s macro equation Internationalise RMB Internationalise RMB Does China want to internationalise the RMB? Yes. It would preserve the value of China’s foreign reserves and facilitate China’s role in the world’s economic and financial affairs. Trade settlement with RMB is already open in Hong Kong. Trade with China can be settled in RMB. Russia, India, Brazil, New Zealand and South Africa now settle trade with RMB. Corporate bonds denominated in RMB are sold in Hong Kong. • The Euro debt crisis presents an opportunity to introduce Europe as an ‘offshore’ market for RMB. • If we take the EFSF €500b provision as a benchmark for a first stage in the internationalisation process of the RMB. No Euro currency crisis…yet? July 2011 No Euro crisis in FOREX markets Waiting costs for permanent ‘rescue package’ ESM in mid 2013 Does China want to internationalise the RMB? Yes. Signals embed into sovereign default probability • Signals from financial media • Probabilities Signalling cycle Default • CDS market responds.. • Debt obligations • Sovereign debt obligations • Restructuring and austerity Financial Crisis ‘Internationalisation’ process • RMB flows out of China into the EU Stage 1 Stage 2 • RMB circulates ‘offshore’ within Europe • And RMB flows back onshore to China Stage 3 EU as ‘off-shore’ market for RMB Liquidity support & Internationalisation of RMB Euro-debt crisis continues & a signalling cycle evolves Template Solution: ECB Issuance of Sovereign ‘default’ Euchina bonds No currency crisis..signals March 1 2012 Fiscal compact treaty signed in Brussels Waiting costs for permanent ‘rescue package’ ESM & Greek default Internationalise the RMB? Yes. HSBC signals ‘off-shore’ London v HK Soft and Hard Euro-zones Avoid debt-deflation trap Commitment to exchange rate targets in 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: ASEAN nations focus on intraregional trade but no common currency. • 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 What lies ahead : Macro Trends? Today Tomorrow Prognosis… China’s mutual inter-dependence in world economy Search for a global solution as EU ‘off-shore’ hub for RMB Euro crisis morphs/dissolves into a new financial innovation And in conclusion….. 2012 is time period t Our prognosis is for time period t+1 THANK YOU ‘’do not wait for the stream to stop before crossing it’’