My Australo-informants at Macquarie in Hong Kong have revised their predictions for 2009 and 2010 GNP growth in the Pacific Rim. They call their report The New Reality.
Their most dramatic forecast is that China growth next year will hit 10.3% vs an earlier growth figure from the same analysts of only 8.9%. Hong Kong and Taiwan growth was also adjusted upward but very modestly. The drop in GNP in Singapore for 2009 was reduced to minus 1.5% from minus 2.5%. But what really intrigued me is the China forecasts.
Macquarie expects that trade surpluses for China will shrink from an estimated 9.1% of gross national product last year to 3.8% in 2010. It evaded the issue of a forecast of the 2011 trade surplus.
China can no longer use domestic productivity gains to convert expensive commodities into cheap i-Pods (or whatever.) Exports are weak. The main state-sector enterprises, beneficiaries of the stimulus program, are inefficient and reduce productivity.
So the rise in Chinese output the analysts expect cannot be export driven. It will be the result of quantitative easing, banks lending more to inefficient SOES, and domestic demand stimulating local Chinese consumption. This reduces productivity rather than boosting it.
The international implications are fascinating. China's monetary easing will mean there is more money around. If the US parallel is anything to go by, more dollars means cheaper dollars. Will more renminbi mean cheaper RMB?
Macquarie is ducking the question citing cyclicality. China still is growing its market share in export markets (even though it is exporting less.) So there will be increased money flow from foreign countries for Chinese goods. Moreover, there will be greater inflows of investment, both direct and portfolio. So foreign currency inflows will continue to grow even though Chinese export dependence will sink.
The balance, Macquarie expects, will be struck so the RMP breaks to the upside. They expect the 6.83 to the dollar peg to break in 2010 as the Chinese currency forges ahead.