12.05.07

Is China headed for a post-Olympics slowdown?

Posted in Strategies, Economic Analysis, Exchange Rates at 8:58 pm by Administrator

At the annual Business Climate Finance Outlook of the German American Business Association of California (www.gaba-network.org), Robert Prion of Citi Private Bank noted that his bank had lowered world economic growth estimates because of the US home mortgage crisis and because of an expected slowdown in China after the Olympics.

In China, the economy remains overheated, in part due to the dollar-pegged exchange rate. Because it is a non-reserve currency and is running a huge trade surplus, the Bank of China has had to undertake major sterilization operations to stop the money supply blowing up because of potential injections of dollars into the Chinese economy. The Chinese authorities have avoided taken the necessary adjustments (allowing the Yuan Renminbi to appreciate or significantly raising interest rates). (It should be noted that the government consolidated all credit decisions last week — a good first step.) However it appears that Beijing wants to wait until after Olympics to apply the brakes.

This is very reminiscent of what happened in Spain during their Olympic year of 1992. I was the economic attaché at the US Embassy during this period. The Spanish had pegged the peseta to the Deutsch Mark in the 1980’s and pumped up the economy with a major public works program to build infrastructure for the Olympics. (Spain was one of the fastest growing countries in the world in the 1980’s.) Shortly after the Olympics finished, Felipe Gonzalez took the necessary corrective actions, which led to his losing power to Aznar.

So in terms of strategy, my advice would to be to plan for a weaker Chinese market and an appreciation of the Renminbi.

What are your thoughts?

Permalink Comments

11.30.07

How to take advantage of the weak dollar

Posted in Strategies, Economic Analysis, Exchange Rates at 5:03 am by Administrator

The economic laws of supply, demand, expectations and speculation work in the long run - it’s just that its sometime difficult to predict when the long run will occur. The mistakes of US economic policy over the past ten years (tax policy that gives incentives to spending over investing, large federal deficits, an energy policy that encourages petroleum imports, lax regulation of the mortgage market to name a few) have caught up with the US. We’re now facing a probable recession that will take several years to work through. One by-product is that the dollar has weakened substantially and it is part of the self-correcting nature of the markets. (The increase in exports helps expand the economy and jump start consumption.)

If your products are denominated in dollars, now is the time for your business to look at international markets. There are some short term profits that can be made solely on the basis of price and you can find those opportunities relatively easily. The mistake that many international business managers make is not following up on the low price “teasers” made possible by the favorable exchange rate. Take advantage of the opening by strengthening your international market presence: you should identify your customers, work as appropriate with distributors or local representatives and find ways to differentiate your produce/service from the competition in that market.

A recent study by the San Francisco Federal Reserve found that the export boom ended when the Fed raised interest rates as the economy matured. Thus, in your market strategy, use the opening to gain new markets and keep a close watch on the Fed’s interest rate policy (particularly the differential with the Euro rates). When the rates change direction, that is the time to work aggressively to keep the international markets.

You’ll find that if you can establish your product through weak and strong dollars, you will have a corporate strategy that will get allow you to weather weak domestic markets by expanding exports.

What is your stategy to take advantage of the weak dollar?

Permalink Comments

11.04.07

Isn’t China’s trade surplus an indication of the strength of the economy?

Posted in Economic Analysis at 11:26 pm by Administrator

Yes and no. It does reflect the incredible dynamism of the world’s fastest economies. Exports are growing and foreign investment is increasing daily. However it did and does come at a cost. Essentially the Chinese kept the Yuan RMB fixed for many years (only recently allowing it slightly appreciate). The exchange rate was maintained to help the export expansion. As surpluses accumulated, the Chinese authorities were faced with a dilemma - to buy up the surplus dollars or let exporters convert them into Yuan, creating a massive increase in the money supply which would lead to inflation. They chose to keep the surplus dollars and as a result are now the largest US creditors. This came at a convenient time for the US as the Bush administration began massive deficit spending to finance the Iraq and Afghanistan wars. Much of the inflationary pressures for the US were “exported” to China who were willing to hold US I-O-U’s. (Greenspan and Bernancke were lucky to have this effect — one point that is consistently ignored in the skill vs luck debate about the Fed.)
We’re now at a turning point. With the housing crunch in the US, the run-up in oil prices and the interest rate cuts, the US dollar has been falling. This will lead to a slowdown in the US economy and an increase in US inflationary pressures. As is already mentioned, China has allowed a small appreciation in the currency and this could accelerate. So China is faced with the same dilemma that Japan faced in the late 1980’s.With the economy built on exports, can it thrive in a period of slower export growth?

Permalink Comments

10.24.07

What are some warning signs of a change in the economy and exchange rate?

Posted in Economic Analysis at 4:07 am by Administrator

One of the most common international business mistakes is to underplay the economy of the target country. You can have a great product, marketing strategy and local partners, but, if the exchange rate changes against you, the product becomes too expensive and nobody buys it.

How can you protect yourself? Having had to quickly become an expert in various economies around the world, I give particular attention to the following:

(you can find this information in the Economist Intelligence Unit country reports or the IMF statistics.)

• changes in commodity prices for the country’s principal exports
• sharp increases in the country’s budget deficit
• increase of inflation rate (and in certain cases an abrupt deflation)
• high levels of debt service (interest payments to exports)
• sharp increases in domestic interest rates.
• an increase in assets held by nationals outside of the country

What indicators do you follow?

Permalink Comments