Transcript New Economic Order:China, US Dollar & the G20

New Economic Order:
China, US Dollar & the G20
Game Perspectives
Patrick McNutt
Web: www.patrickmcnutt.com
Blog: www.mcnutt.tm.mbs.ac.uk
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 coordinated 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.
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
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.
Old view……….
National markets
Other
economies
C+G
National growth
National
companies
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 nontechnology 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.
Paradigm Shift occuring……….
Global markets
ASLEEP
economies
X:Trading
Blocs
Global growth
Global
companies
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
Real Time Information Flow
Non-traditional FDI:
Not ‘bricks and mortar’
Business
Strategy:
’Trade in
Tasks’
Resources
Mobile
&
Capital:
Materials:
‘Trade in e‘Trade in
Funds’
Scarcity’
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
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
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
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
‘Credible threat’ signalling language used……..
a) Debt-deflation trade-off
Credible
threats
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
Debt & Financial
Complexity
Convoluted
debt
Deflation
Jan 2010: President Obama in State of
Union address: importance of exports
Sino-French alliance on global currency:
IMF’s SDR substitution account
’
Solutions
Opportunities
Critical Timeline March - September 2009:
US and China
23 Mar 2009
1. China CB Governor
raises the issue of the
role of US $.
Diplomatic language
‘lost in translation’
22 June 2009
7 July 2009
3. BW theme
of ‘new
protectionism’
; FT theme of
‘currency
misalignment’
.
5. Italy and
France no to
‘normal’
17 August 2009
28 July 2009
15 July 2009
7 Signals that
China biggest X
than Germany
8. China US
Strategic Econ
Summit
11. IMF on
Asian need to
M. China
signals
‘inflation’
12. G20 Pittsburg
Summit
2. G20 London Summit
4 China signal on
‘normal’ Agenda
with exchange
rates
22 Sept 2009
6. G20 Italy
Summit
8 July 2009
9. Signals on WS
‘bull’ market
2 April 2009
5 July 2009
31 July 2009
10. Iron ore
reaches $100
tonne spot
2 August 2009
Critical Timeline November 2009 - February 2010:
US and China
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
$328b
dd.mm. 2010
20 Feb 2010
22 Feb 2010
7 Obama Time
Magazine
interview and
China must
revalue ‘overheating
economy’
8. Chinese
commercial
banks increase
reserves
11. Signal.we
observe.
12. G20 Canada
Summit Toronto
2. Economic commentators
calling for 25% revaluation
4 Obama State of
Union focus on X
but silent on
exchange rates
20 Dec 2009
1 Feb 2010
6. Obama meets
Dali Lama
19 Feb 2010
26-27 June 2010
9. IMF and 4%
inflation target
and justifying
capital controls
20 Feb 2010
10. Signal..we
observe
dd.mm.2010
Commitment to exchange rate targets 2010-2012
with escape clauses ….why?
• Global growth will depend on world exports as domestic
demand continues to fall.
• China Yuan/RMB is ‘captive’ to other countries exchange
rate policies
• EMs and ASLEEP economies will substitute export-led
growth for more G
• Beggar-my-neighbour policies emerge: both US and
China cannot rely on export-led growth simultaneously
• China needs to increase domestic consumption
• China limited on interest rates moves due to capital
inflows
2010
Policy A
2010
Policy B
2010
Policy A
2010
Policy B
Solution 2010-2012
Managed Exchange
rates: US$ and RMB
US X and China M in
world rebalance
China controls
inflation & asset
bubbles
EMs & ASLEEP
Deflation-Debt
More G and
Socialising losses
‘Captive’ exchange
rates
Beggar-myNeighbour policies
Deflation-Debt
More G and
Socialising losses
‘Captive’ exchange
rates
Beggar-myNeighbour policies
Solution 2015
Currency
fluctuations
Reflation and
taxation
protectionism
devaluation
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
And in conclusion…..
2010 is time period t
Our prognosis is for time period
t+1
Investment Cycle
Information
Signals
Monetary
policy
does not
work
Moral hazard
embedded in risk
analysis
Private Equity: Prognosis
• Herding and Panic
• Virtualisation and
absence of
scarcity in
resources
Information
Processing
Weightless
companies
• Latest technology
• Signals v company
fundamentals
• Geo-politics
• Ease of trade v
ease of entry
Intra-Regional
Virtual Trade
Global Economic Outlook
Creating 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.
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]
THANK YOU
‘’do not wait for the
stream to stop
before crossing it’’