Transcript Signalling Keynesian - EconIssues – Patrick A McNutt

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 5060% 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
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
CTL: November 2009 - October 2010:
observe a pattern
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
$328b
30 Sept . 2010
24 Feb 2010
22 Feb 2010
7 Obama Time
Magazine
interview and
China must
revalue ‘overheating
economy’
8. Chinese
commercial
banks increase
reserves
11. US
Congress Bill
on tariffs
12. Brazil Minister
Mantega: Plaza 2
2. Economic commentators
calling for 25% revaluation
4 Obama State of
Union focus on X
but silent on
exchange rates
20 Dec 2009
1 Feb 2010
6. Obama meets
Dali Lama
19 Feb 2010
8 Oct 2010
9. IMF and 4%
inflation target
and justifying
capital controls
20-25 Feb 2010
10. G20 Canada
Summit Toronto
26-27 June.2010
CTL: January 2011 to 2012
memory & belief
1 Jan 2011
1. MEMORY IN THE
GAME 2009-2010
BW focus on Gini for
China = 0.5
8 Feb 2011
22 Nov 2011
5. ECB says
No to Eurobonds
3. PBC
increases
interest rates
to 6.06%
dd.mm. 2012
12 Feb 2012
22 Feb 2012
7 IMF Report on
importance of
EU trade t o
China
8. Chinese Wen
Jiabao: China
ready to solve
EU debt crisis
11. TODAY
Time period t
12. TODAY Time
period t
2. China relaxes currency
laws
4 RMB
strengthens to
6.37 v US$
6. Xinhua News
agency: Germany
should do more
dd.mm.2012
9. V-President
Jinping China ‘will
help; in Dublin
8 Jan 2012
12 Jan 2011
1 Sept 2011
21 Feb 2012
10. PBC Report
signal ‘open’ the
financial system
23.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 nontechnology 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
Signaling cycle evolves in
2012….
BUY
Rumours
Signals
SELL:
Financial
News
Paradigm Shift occuring……….
Global markets
ASLEEP
economies
X:Trading
Blocs
Global growth
Global
companies
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.
Template solution
• 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
‘Thief of Nature’ solution
EU:Avoid
debtdeflation
China’s
macro
equation
Internationalise
RMB
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.
No Euro currency crisis…yet?
July 2011 No Euro crisis in
FOREX markets
Waiting costs for
permanent ‘rescue
package’ ESM in mid 2013
Does China want to
internationalise the RMB?
Yes.
Signals embed into sovereign
default probability
• Signals from
financial media
• Probabilities
Signalling
cycle
Default
• CDS market
responds..
• Debt
obligations
• Sovereign debt
obligations
• Restructuring
and austerity
Financial
Crisis
EU as ‘off-shore’ market for RMB
Liquidity support
&
Internationalisation
of RMB
Euro-debt crisis
continues & a
signalling cycle
evolves
Template Solution:
ECB Issuance of
Sovereign ‘default’
Euchina bonds
‘Internationalisation’ Process
• RMB flows
out of China
into the EU
Stage 1
Stage 2
• RMB
circulates
‘offshore’
within Europe
• And RMB
flows back
onshore to
China
Stage 3
No currency crisis..signals
March 1 2012 Fiscal compact treaty
signed in Brussels
Waiting costs for permanent ‘rescue
package’ ESM & Greek default
Internationalise the RMB? Yes.
HSBC signals
Soft and Hard Euro-zones
Avoid debt-deflation trap
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 intraregional 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
What lies ahead : Macro Trends?
Today
Tomorrow
Prognosis…
China and mutual
inter-dependence
in a world
economy
Search for a
global solution as
EU ‘off-shore’ hub
for RMB
Euro crisis
morphs/dissolves
into a new
financial
innovation
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’’