New Economic Order: China, US Dollar & the G20

1. New Economic Order: China, US Dollar & the G20 Game Perspectives Patrick McNutt Web: www.patrickmcnutt.com Blog: www.mcnutt.tm.mbs.ac.uk

2. The storybook…… • The world economy is now enduring a signalling cycle that probably began in the US on March 12th 2007 and it will continue to oscillate until either a market equilibrium (= continued recession with global imbalances on trade and currency fluctuations) or a co-ordinated equilibrium is reached. The latter could be achieved initially at the G-20 Summits if a managed exchange rate regime was on the agenda and a loud unambiguous signal transmitted to the international investment and financial community, with escape clauses, of a managed regime 2010 to 2012. It’s the best governments can do given the uncertainty in the world financial markets.

3. 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

4. Paradigm shift 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. US depends on Chinese credit; China has $790b of US debt Trading blocs: only 25% of ASEAN exports go outside the trading bloc Chinese exports growing by 30% to India, Brazil, Mexico and Indonesia.

5. Old view……….

6. 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 non-technology to technology & innovation sectors. • Corporate Planning: Output ►demand ►income • Capital flows to EMs increasing to approx $700b in 2010 from $450b in 2008/2009. • China: both PE and FDI in EMs, ASLEEP.

7. Paradigm Shift occuring……….

8. Less emphasis on a national market (crowding-out): More emphasis on a global market of trading blocs (crowding-in): GDP = C (M) + X + Corporate Investment/FDI => Focus on global growth Emphasis products & services with global reach => Focus on global companies: geography and industry Emphasis on Emerging markets in Asia, Latin America and Eastern Europe & Pacific Rim (ASLEEP) ASLEEP economies to account for at least 50% of global growth, 30% of world exports by 2015

9. Real Time Information Flow

10. China equation: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 • 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

11. Capital flows and FDI • Capital controls may be increased • Revalue Yuan/RMB (most likely in Q3 2010 post-G20 in Canada) • 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

12. 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

13. Critical Time Line • 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

14. ‘Credible threat’ signalling language used…….. a) Debt-deflation trade-off Beggar-my-neighbour deflation, devaluing currency to increase export competitiveness b) ‘Credible threat’ policy formulation Nov 2009: APEC meeting signal on China to allow Yuan.RMB revalue in 2010 Jan 2010: President Obama in State of Union address: importance of exports Sino-French alliance on global currency: IMF’s SDR substitution account ’

15. Critical Timeline March - September 2009: US and China 23 Mar 2009 22 June 2009 7 July 2009 17 August 2009 28 July 2009 15 July 2009 22 Sept 2009 8 July 2009 2 April 2009 5 July 2009 31 July 2009

16. Critical Timeline November 2009 - February 2010: US and China 14 Nov 2009 10 Jan 2010 8 Feb 2010 dd.mm. 2010 20 Feb 2010 22 Feb 2010 26-27 June 2010 19 Feb 2010 20 Dec 2009 dd.mm.2010 1 Feb 2010 20 Feb 2010

17. 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

19. Managed exchange rates • Managed exchange rates to ‘manage’ corporate earnings/FDI, Chinese inflation. • ‘Manages’ protectionist trading blocs with a common currency: GCC, NAFTA, APEC, EU, ASLEEP • ‘Manages’ the degree of uncertainty in financial markets • ‘Manages’ Export-led growth v Domestic demand • ‘Manages’ China, Japan, ASLEEP surpluses v US indebtedness

20. And in conclusion….. 2010 is time period t Our prognosis is for time period t+1

21. Investment Cycle

22. Private Equity: Prognosis

23. Global Economic OutlookCreating opportunities Preamble • Signalling cycle ≠ a business or trade cycle. It arises from non-binding chat at time period T. • Signalling cycle => a requirement for a new international economic order in the geo-political space to focus on the redistribution of world trade and income. THE NEW POTENTIAL (First-best solutions: to dampen or break down the cycle) • MSCI Emerging Markets Index has risen 75% in 2009. • The EU, US and Asian banks and financial institutions will determine the length of the cycle via co-ordinated management of global capital flows. • ASLEEP/EMs to account for at least 50% of global growth. • Corporate Investment plans of 3 years for ‘global reach’ in the ASLEEP/EMs (i) infrastructure projects, (ii) technology and (iii) product and services innovation.

24. Concluding • China will signal revaluation in Q3 2010, depending on information on Imports, domestic inflation and FDI and PE. • Currency fluctuations will continue to depress Q2-Q3 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]

25. THANK YOU ‘’do not wait for the stream to stop before crossing it’’