China Economy, EU

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China Economy, EU RMB

• Signalling Cycles and Game Perspectives
• Patrick McNutt, FRSA
• Web www.patrickmcnutt.com

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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 policymakers
  commitment (PLT)
• Signalling recognises that our economic system is
  dynamic

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Emerging signals sub-game

• Chinas RMB signals from Q32010 depend on
  information on domestic inflation targets.
• Currency fluctuations continue to depress
  corporate earningsTNCs (Unilever, PG, 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 on G20
  Agenda..Canada June 2010 or S.Korea November
  2010

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Game on.yoyo exchange

• China and its currencydoes 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
  exchangeEuro/USD - Euro weakens/strengthens as
  USD strengthens/weakens and US peg

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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

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CTL March - September 2009 US and China cycle
begins
23 Mar 2009
22 June 2009
7 July 2009
1. China CB Governor raises the issue of the role of US . Diplomatic language lost in translation
3. BW theme of new protectionism FT theme of currency misalignment.
5. Italy and France no to normal
17 August 2009
28 July 2009
11. IMF on Asian need to M. China signals inflation
15 July 2009
8. China US Strategic Econ Summit
7 Signals that China biggest X than Germany
12. G20 Pittsburg Summit
22 Sept 2009
6. G20 Italy Summit
4 China signal on normal Agenda with exchange rates
2. G20 London Summit
10. Iron ore reaches 100 tonne spot
9. Signals on WS bull market
8 July 2009
2 April 2009
2 August 2009
5 July 2009
31 July 2009
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CTL November 2009 - October 2010 observe a
pattern
14 Nov 2009
10 Jan 2010
8 Feb 2010
1. At APEC Meetings signal that China will allow Yuan/RMB revalue in 2010.
3. At AEA Meeting Bernanke on low interest rates
5. OECD/MoodyChina Current Account Surplus 328b
30 Sept . 2010
24 Feb 2010
11. US Congress Bill on tariffs
22 Feb 2010
8. Chinese commercial banks increase reserves
7 Obama Time Magazine interview and China must revalue over-heating economy
12. Brazil Minister Mantega Plaza 2
8 Oct 2010
6. Obama meets Dali Lama
4 Obama State of Union focus on X but silent on exchange rates
2. Economic commentators calling for 25 revaluation
9. IMF and 4 inflation target and justifying capital controls
10. G20 Canada Summit Toronto
19 Feb 2010
20 Dec 2009
26-27 June.2010
1 Feb 2010
20-25 Feb 2010
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CTL January 2011 to 2012 memory belief
1 Jan 2011
8 Feb 2011
22 Nov 2011
MEMORY IN THE GAME 2009-2010 BW focus on Gini for China 0.5
3. PBC increases interest rates to 6.06
5. ECB says No to Euro-bonds
dd.mm. 2012
12 Feb 2012
11. TODAY Time period t
22 Feb 2012
8. Chinese Wen Jiabao China ready to solve EU debt crisis
7 IMF Report on importance of EU trade t o China
12. TODAY Time period t
dd.mm.2012
6. Xinhua News agency Germany should do more
4 RMB strengthens to 6.37 v US
2. China relaxes currency laws
9. V-President Jinping China will help in Dublin
10. PBC Report signal open the financial system
8 Jan 2012
12 Jan 2011
23.Feb.2012
1 Sept 2011
21 Feb 2012
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Observations in 2010

• SP 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 non-technology
  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.

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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 Chinas currency practices
  lost jobs in US
• German bond yields come under threat in 2011.

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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

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Signaling cycle evolves in 2012.
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Paradigm Shift occuring.

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EU avoid debt-deflation

• Second-best solution

• Template 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.

• Pan-European solution that supports the Euro as
  an international reserve currency
• Liquidity support for RMB
• Avoids a debt-deflation cycle embedding into EUs
  real economy
• Process De-list insolvent banks to IPO to
  efficient consolidated EU banking sector.

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Chinas 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
• Chinas main stock index now trades p/e 31
  higher by 50 on SP500.
• Capital inflows to China either revalue,
  accumulate reserves or decrease interest rates

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Thief of Nature solution
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Internationalise RMB

• 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.

• Does China want to internationalise the RMB? Yes.
  It would preserve the value of Chinas foreign
  reserves and facilitate Chinas role in the
  worlds 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.
•  

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No Euro currency crisisyet?
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Signals embed into sovereign default probability
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EU as off-shore market for RMB
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Internationalisation Process
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No currency crisis..signals
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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 intra-regional 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

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What lies ahead Macro Trends?
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Prognosis
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And in conclusion..

• 2012 is time period t
• Our prognosis is for time period t1

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