Chinas Economy in a World Economy 2010 2015

China’s Economy in a World Economy: 2010 -2015 Signalling Cycles and Game Perspectives Patrick Mc. Nutt Web: www. patrickmcnutt. com Blog: www. mcnutt. tm. mbs. ac. uk

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

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

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

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

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 3. BW theme of ‘new protectionism’; FT theme of ‘currency misalignment’. 7 July 2009 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. G 20 Pittsburg Summit 2. G 20 London Summit 4 China signal on ‘normal’ Agenda with exchange rates 2 April 2009 5 July 2009 22 Sept 2009 6. G 20 Italy Summit 8 July 2009 9. Signals on WS ‘bull’ market 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 $328 b 28. Sept. 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. TODAY: any signals? ? 12. G 20 Summit South Korea 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 9. IMF and 4% inflation target and justifying capital controls 20 Feb 2010 11 -12 November 2010 10. Ms Hu Xiaolian on exchange rates 26. July. 2010

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. • Capital flows to EMs increasing to approx $700 b in 2010 from $450 b in 2008/2009. • China: both PE and FDI in EMs, ASLEEP.

Paradigm shift in world economy 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&P 500. Trading blocs: only 25% of ASEAN exports go outside the trading bloc Chinese exports growing by 30% to India, Brazil, Mexico and Indonesia.

Paradigm Shift occuring………. Global markets ASLEEP economies X: Trading Blocs Global growth Global companies

China’s 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…. • China’s main stock index now trades p/e = 31: higher by 50% on S&P 500. • Capital inflows to China » either revalue, accumulate reserves or decrease interest rates

China in 2010: Capital flows and FDI • Signals from PBC on flexibiltiy on exchange rate • Revalue Yuan/RMB (most likely in Q 4 2010 post-G 20 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

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

And in conclusion…. . 2010 is time period t Our prognosis is for time period t+1

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 Q 3 -Q 4 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 will be on G 20 Agenda. . Canada [June 2010] or S. Korea [November 2010]

THANK YOU ‘’do not wait for the stream to stop before crossing it’’