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					China’s Economy in a World
 Signalling Cycles and Game Perspectives
              Patrick McNutt
                 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
           Tool of Analysis
• We define a Critical Time Line [CTL] of
• These are the signals
• We search for an observed pattern in the
• 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
• Government policy is ‘signalled’
• Economic policy depends on
  policymaker’s commitment (PLT)
• Signalling recognises that our economic
  system is dynamic
             Critical Time Line

•   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            22 June 2009       7 July 2009

                          3. BW theme       5. Italy and                                                17 August 2009
                          of ‘new           France no to                      28 July 2009
1. China CB Governor      protectionism’    ‘normal’
raises the issue of the   ; FT theme of                                                                 11. IMF on
                                                             15 July 2009                               Asian need to
role of US $.             ‘currency                                           8. China US
Diplomatic language       misalignment’                                       Strategic Econ            M. China
‘lost in translation’     .                                 7 Signals that    Summit                    signals
                                                            China biggest X                             ‘inflation’
                                                            than Germany

                                                                                                                    12. G20 Pittsburg

                                                                                                                     22 Sept 2009
                                   4 China signal on       6. G20 Italy
                                   ‘normal’ Agenda         Summit
                                   with exchange                                                   10. Iron ore
 2. G20 London Summit                                                           9. Signals on WS
                                   rates                                                           reaches $100
                                                            8 July 2009         ‘bull’ market
        2 April 2009                                                                               tonne spot
                                      5 July 2009                                 31 July 2009      2 August 2009
        Critical Timeline November 2009 - February 2010:
                           US and China
   14 Nov 2009                10 Jan 2010       8 Feb 2010

                                               5.                                                          28.Sept. 2010
                                               OECD/Moody                        20 Feb 2010
1. At APEC Meetings           3. At AEA        China Current
signal that China will        Meeting          Account          22 Feb 2010                                 11. TODAY:
allow Yuan/RMB                Bernanke on      Surplus                           8. Chinese
                                                                                                            any signals??
revalue in 2010.              low interest     $328b            7 Obama Time     commercial
                              rates                             Magazine         banks increase
                                                                interview and    reserves
                                                                China must
                                                                revalue ‘over-

                                                                                                                       12. G20 Summit
                                                                                                                       South Korea
                                                                                                                        11-12 November
                                       4 Obama State of        6. Obama meets                                           2010
                                       Union focus on X        Dali Lama           9. IMF and 4%
2. Economic commentators
                                       but silent on                               inflation target
calling for 25% revaluation                                                                           10. Ms Hu
                                       exchange rates                              and justifying
                                                                19 Feb 2010                           Xiaolian on
                                                                                   capital controls
       20 Dec 2009                                                                                    exchange rates
                                         1 Feb 2010                                 20 Feb 2010        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 &
• 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.
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&P500.
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       X:Trading        Global
economies       Blocs        companies

            Global growth
     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
• 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&P500.
• Capital inflows to China » either revalue, accumulate
  reserves or decrease interest rates
  China in 2010: Capital flows and
• 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
 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
 And in conclusion…..

     2010 is time period t
Our prognosis is for time period
   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]

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

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