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China Economy, EU & RMB. Signalling Cycles and Game Perspectives Patrick McNutt, FRSA Web: www.patrickmcnutt.com. Why a signalling cycle?. Financial and economic variables create cyclical patterns (CTL)
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China Economy, EU & RMB Signalling Cycles and Game Perspectives 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 50-60% 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 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 and 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 - belief and actions
CTL: March - September 2009: US and China: cycle begins 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
CTL: November 2009 - October 2010: observe a pattern 14 Nov 2009 10 Jan 2010 8 Feb 2010 30 Sept . 2010 24 Feb 2010 22 Feb 2010 8 Oct 2010 19 Feb 2010 20 Dec 2009 26-27 June.2010 1 Feb 2010 20-25 Feb 2010
CTL: January 2011 to 2012 memory & belief 1 Jan 2011 8 Feb 2011 22 Nov 2011 dd.mm. 2012 12 Feb 2012 22 Feb 2012 dd.mm.2012 8 Jan 2012 12 Jan 2011 23.Feb.2012 1 Sept 2011 21 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 and GCC] v Anglo-Saxon & US • Creative Industry: Transition from non-technology to technology & innovation sectors. • Capital flows to EMs increasing from a base of $450b in 2008/2009. • China: both PE and FDI in EMs, ASLEEP.
Observations in 2011 • 28-30 March 2011 Yen rises to 76 v US$ 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: second-best solutions emerge… • EU cannot fix debt crisis unless it fixes the banks • Many EU banks are insolvent • Treasure hunt of potential default nations • Common pool problem 1/n • Bank debt ‘crowd-in’ sovereign debt • Role of SWFs • Restructure for IPO • Debt for equity swap • Debt obligations arrangements put in place
Template solution 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. 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: De-list insolvent banks to IPO to efficient consolidated EU banking sector.
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
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 ‘Euchina bond’ in return for a first stage in the internationalisation process of the RMB.
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 intra-regional 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
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’’
