Transcript Country Risk Analysis

Current Issue
China
Current Issues
“Creating a stable foreign-currency regime that
doesn't give an edge to one country or another
"is the central existential challenge of
cooperation internationally,"
--- Treasury Secretary Geithner in remarks to
Brookings Institution
Source: WSJ Oct 7, 2010
Current Issues
China
“When large economies with undervalued
exchange rates act to keep the currency from
appreciating, that encourages other countries
to do the same," . . . . "This sets off a
dangerous dynamic" [as nations compete to
keep their currencies undervalued.]
---- Treasury Secretary Geithner
Source: WSJ Oct 7, 2010
Current Issues
China
“[Countries employing competitive-currency
politics risk] 'causing inflation and asset
bubbles in emerging economies or else
depressing consumption growth and
intensifying short-term distortions in favor of
exports.' "
---- Treasury Secretary Geithner
Source: WSJ Oct 7, 2010
According to AP story Oct 6, 2011:
“President Obama said [at] a news conference
Thursday that it was 'indisputable' that the
Chinese 'intervene heavily in the currency
markets'”
Current Issues
China
“If the yuan is not stable, it will bring disaster to
China and the world. If we increase the yuan
by 20% or 40% ...many of our factories will
shut down and society will be in turmoil."
-- Wen Jiabao, China's prime minister
Source: WSJ Oct 7, 2010
China
China: Outstanding Issues
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Currency: US dollar vs yuan vs world currency
Investments in USG securities
China's large bilateral trade surpluses with US
Intellectual property rights infringements
Military/political issues, China's navy expansion,
6 party talks, trade issues, human rights (Tibet),
etc.
China Before Reforms
• Prior to 1979 China was very poor:
• Communist regime under Mao took control of
mainland in 1949
• Economy came under control of communist
party (and still is)
• Economy was:
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state controlled
centrally controlled
command controlled (cement production, eg)
China Before Reforms
• Farms in 1950s were collectivized into large
communes
• Efforts to jump start industrialization failed in
1950s
• By 1960s, central government began massive
investments to create centrally controlled stateowned enterprises
• Cultural Revolution (1966-1976) set back
development enormously
China in the 1970s
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By 1978, three fourths of industrial production was
produced by SOEs with planned output targets
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Virtually no private enterprises or foreign investment
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Effort to make economy self-reliant was a key goal of
central government
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Economy almost stagnant and very inefficient
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No profit incentives, no competition
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Price and production controls widespread
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Deep poverty – annual per capita income less than
$300 (?)
Economic reforms 1980s to present
• Mao dies in 1976
• Deng Xiaoping becomes paramount leader by
1979
• Deng began reforms through economic
liberalization described by Deng as “Socialism
with Chinese characteristics”
• Allowed for price incentives for farmers and
small free farm-based markets
• Established diplomatic relations with the US
after US dropped ties with Taiwan
Macro changes to the economy in
the 1980s
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Established four special economic zones (SEZs)
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Decentralized some economic planning to province level
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Began rapid opening to the West . . . .
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Joined IMF
Began negotiations to join GATT/WTO
Developed bilateral ties with the US and other
western nations
• Joint Economic Committee with US Treasury
• Joint Trade Commission with US Commerce
Dept
Current Conditions in China
• China's economy grew about 10.4 percent in
2010 – about average over the past ten years
• Real GDP in 2011 rose about 9 percent
• $580 billion stimulus package announced in Nov
2008 helped at beginning of international crisis –
what US has pushed for
• Boosted domestic spending on infrastructure,
etc. Urban fixed asset spending jumped 26% in
January and February YOY
• Exports were down 26% - now recovered
Current Conditions in China (cont.)
• Environmental rules weakened. Review time for
new building proposals reduced to two days
from five
• Export taxes may be reduced to zero
• No plans for a dramatic revaluation of Yuan
against US$
• If economy further weakens, could see devalued
to boost exports
• Emphasis on domestic demand
Issues for China
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Property bubble?
Inflation?
Greater intervention of government in economy?
More charges of currency manipulation
Escalation of trade/currency war with United
States and other trading partners?
• Treasury Secretary Geithner continued pressure
on China
China's Primary Concerns . . .
. . . . not that the US will default,
• Rather, that USG current spending will lead to
inflation . . .
• And inflation will cause the US dollar to
depreciate . . .
• Leading Chinese assets in the United States,
including US Government debt, to be devalued
• Treasury bonds could drop in value as US
economy languishes, further hurting Chinese
investments
Foreign Holdings of US Treasuries
Foreign Ownership of US Debt
Source: “Foreign Ownership of US Debt Continues to Grow” by Veronique de Rugy at the Mercatus Center at George Mason University
(http://mercatus.org/publication/foreign-ownership-us-debt-continues-grow)
Japan Holdings of US Treasuries
Russia Holdings of US Treasuries
OPEC Holdings of US Treasuries
Dollar is Vulnerable because . . .
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USG spending at record amounts in 2009 and
beyond . . .
Fed announced in 2009 it would purchase
another $1.1 trillion of US Government and
Agency debt – could devalue dollar through
inflationary effects
New plans to purchase $600 billion will do
more to dollar
Treasury secretary remarks in NY in March
2009 led to a dollar decline of about 1.5% in
ten minutes. It matters what you say when
you are Treasury Secretary
Dollar is Vulnerable because . . .
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Investors and speculators remain wary of $
future with new administration's spending
plans and . . . .
China's new assertiveness
Greece has saved the day – for now
Trade Weighted Value of US$
Several Key Issues for World
Financial System
• Should the yuan be pushed as a new reserve
currency alongside the US dollar, yen and Euro
• Should there be a new world currency based on
a basket of currencies – a “super-sovereign
reserve currency”
• Will China seek other financial markets to invest
reserves
Yuan as a Major Currency
• Yuan not capable of replacing the dollar, the
pound, the yen, the Euro or any other
industrialized nation's currency
• China's financial markets not mature enough
• Too many controls on currency in its immature
banking system
• Yuan has never floated on international markets
- rather unsettling for govt
World Currency?
• China (and Russia) suggesting it is time for a new
world reserve currency, based on a basket of existing
currency
• China's position in part a shot at Geithner's comments
about the Chinese government manipulating the
currency in January 2009
• Chinese feeling emboldened about its position as
largest holder of international reserves (over $2 trillion)
and largest single foreign holder of US government
securities (around $800 billion)
• Despite initial confusion, US does not favor a new
world currency, but would not object to an enhanced
use of the existing SDR
World Currency (cont.)
• New world currency (however defined) would
struggle to gain the trust of the dollar
• SDR has languished since its creation in 1969
as a unit of account for internal IMF
bookkeeping
• World currency could prove to be too inflexible
for nearly 200 disparate economies
• Likely restrict growth and innovation
• Who would manage it? How? Which money
supply?
Summary
Concerns for Chinese Government
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Rules of law still not established enough for
foreign investors
Future of State owed Enterprises and U rate
Income inequality
Asset Bubbles
Environmental concerns
International political issues:
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Tibet
North Korea/Japan
Taiwan/US Navy/China's Navy
Yuan/US$ exchange rate
China Exports
China Imports
China Current Account Balance
Current Account Balance as Percent
of GDP
China Industrial Production
China's Foreign Exchange Reserves
(billions of US$)
China Holdings of US Treasuries
China's Domestic Economy
China's GDP YOY
China per capita GDP
in Yuan
China Population
FDI in China
Foreign Direct Investment in China
as percent of GDP
China Inflation
China Unemployment Rate