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China’s Economy in a World Economy:2010-2015

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?

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China’s Economy in a World Economy:2010-2015

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  1. 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

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. Critical Timeline November 2009 - February 2010: US and China 14 Nov 2009 10 Jan 2010 8 Feb 2010 28.Sept. 2010 20 Feb 2010 22 Feb 2010 11-12 November 2010 19 Feb 2010 20 Dec 2009 26.July.2010 1 Feb 2010 20 Feb 2010

  8. 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. • Capital flows to EMs increasing to approx $700b in 2010 from $450b in 2008/2009. • China: both PE and FDI in EMs, ASLEEP.

  9. 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.

  10. Paradigm Shift occuring……….

  11. 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

  12. 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

  13. 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

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

  15. 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]

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

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