Transcript DubaiSHGEUPaperSignalsMarch2012Final

Financial Signals: China & the
RMB
Game Perspectives - Relevance for
MENA/GCC
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 rates
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..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 on belief and actions
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
$328b
30 Sept . 2010
24 Feb 2010
22 Feb 2010
7 Obama Time
Magazine
interview and
China must
revalue ‘overheating
economy’
8. Chinese
commercial
banks increase
reserves
11. US
Congress Bill
on tariffs
12. Brazil Minister
Mantega: Plaza 2
2. Economic commentators
calling for 25% revaluation
4 Obama State of
Union focus on X
but silent on
exchange rates
20 Dec 2009
1 Feb 2010
6. Obama meets
Dali Lama
19 Feb 2010
8 Oct 2010
9. IMF and 4%
inflation target
and justifying
capital controls
20-25 Feb 2010
10. G20 Canada
Summit Toronto
26-27 June.2010
CTL: January 2011 to 2012
memory & belief
1 Jan 2011
1. MEMORY IN THE
GAME 2009-2010
BW focus on Gini for
China = 0.5
8 Feb 2011
22 Nov 2011
5. ECB says
No to Eurobonds
3. PBC
increases
interest rates
to 6.06%
dd.mm. 2012
12 Feb 2012
22 Feb 2012
7 IMF Report on
importance of
EU trade t o
China
8. Chinese Wen
Jiabao: China
ready to solve
EU debt crisis
11. TODAY 1
Time Period t
12. TODAY 2
Time Period t
2. China relaxes currency
laws
4 RMB
strengthens to
6.37 v US$
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
on more open
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, MENA
(GCC)] v Anglo-Saxon & US
• Creative Industry: Transition from nontechnology to technology & innovation sectors.
• Capital flows to EMs increasing from a base of
$450b in 2008.
• China: both PE and FDI in EMs, ASLEEP.
Observations in 2011
• 28-30 March 2011 Yen rises to 76 v US$ 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
• EU cannot fix debt
crisis unless it fixes
the banks
• China-MENA [GCC]
FDI
• GCC issues: US$ peg
and/or monetary
union
• Arab spring effect
• Bank debt ‘crowd-in’
sovereign debt: role
of SWFs
• ‘Derived impact’ of
FDI
• MENA [oil & gas
exporters] 75R:70X;
world supply 70 [oil]
50 [gas]
• Diversify
New Geo-political order
• Emerging markets: young population, technology
transfer, creative industries, and FOREX reserves:
EMs, GCC, ASEAN and BRIC
• More FOREX
of US $.
Non-dollar Assets and the role
• EMs’ Equity markets: High P/E due to high GDP
growth.
• Future economics of Africa: 2.7% world output 2011
Paradigm Shift occuring……….
Global markets
ASLEEP
economies
X:Trading
Blocs
Global growth
Global
companies
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
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: Increased role
for GCC SWFs
‘Thief of Nature’ solution
EU 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
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
‘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
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
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 ‘off-shore’
London v HK
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’s mutual
inter-dependence
in 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’’