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Chinas Economy in a World Economy:2010-2015 Chinas Economy in a World Economy:2010-2015 Signalling Cycles and Game Perspectives Patrick McNutt Web: www.patrickmcnutt.com.

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Presentation on theme: "Chinas Economy in a World Economy:2010-2015 Chinas Economy in a World Economy:2010-2015 Signalling Cycles and Game Perspectives Patrick McNutt Web: www.patrickmcnutt.com."— Presentation transcript:

1 Chinas Economy in a World Economy:2010-2015 Chinas Economy in a World Economy:2010-2015 Signalling Cycles and Game Perspectives Patrick McNutt Web: www.patrickmcnutt.com 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 policymakers 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 1. China CB Governor raises the issue of the role of US $. Diplomatic language lost in translation 23 Mar 2009 2. G20 London Summit 2 April 2009 3. BW theme of new protectionism ; FT theme of currency misalignment. 22 June 2009 4 China signal on normal Agenda with exchange rates 5 July 2009 5. Italy and France no to normal 7 July 2009 6. G20 Italy Summit 8 July 2009 7 Signals that China biggest X than Germany 15 July 2009 8. China US Strategic Econ Summit 28 July 2009 9. Signals on WS bull market 31 July 2009 10. Iron ore reaches $100 tonne spot 2 August 2009 11. IMF on Asian need to M. China signals inflation 17 August 2009 Critical Timeline March - September 2009: US and China 12. G20 Pittsburg Summit 22 Sept 2009

7 1. At APEC Meetings signal that China will allow Yuan/RMB revalue in 2010. 14 Nov 2009 2. Economic commentators calling for 25% revaluation 20 Dec 2009 3. At AEA Meeting Bernanke on low interest rates 10 Jan 2010 4 Obama State of Union focus on X but silent on exchange rates 1 Feb 2010 5. OECD/Moody China Current Account Surplus $328b 8 Feb 2010 6. Obama meets Dali Lama 19 Feb 2010 7 Obama Time Magazine interview and China must revalue over- heating economy 22 Feb 2010 8. Chinese commercial banks increase reserves 20 Feb 2010 9. IMF and 4% inflation target and justifying capital controls 20 Feb 2010 10. Ms Hu Xiaolian on exchange rates 26.July.2010 11. TODAY: any signals?? 28.Sept. 2010 Critical Timeline November 2009 - February 2010: US and China 12. G20 Summit South Korea 11-12 November 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 Worlds 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………. Paradigm Shift occuring………. X:Trading Blocs Global markets Global companies Global growth ASLEEP economies

11 Chinas 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…. Chinas 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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