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’’