pro manchester CEO

UK Economics : Is the march of the makers, a case of lions led by donkeys?

"Lions led by donkeys" is a phrase used to describe the British Infantry of the First World War and to condemn the generals who commanded them. The contention is that brave soldiers (lions) were sent to their deaths by incompetent and indifferent leaders (donkeys).

"The English Generals are wanting in strategy. We should have no chance if they possessed as much science as their officers and men had of courage and bravery. They are lions led by donkeys." According to the German Command Headquarters.

Strategy in business and in war is key. Which battles at which time, with what resource. SWOT profiling, constant benchmarking is key to success. Understanding this makes it more difficult to understand the present coalition strategy in expecting so much of the manufacturing sector and denying the contribution of the business, financial and professional services sector, especially banking,  to the British Economy

The march of the makers, rebuilding the workshop of the world to finance the big society is  a battlefield folly. The march is faltering, the trade deficit continues to expand. The analysis of forty years of UK trade amply demonstrates the UK needs a strong service sector to finance the trade in goods deficit.

According to a recent paper by Yiping Huang and Bijun Wang, 2011 China’s manufacturing sector accounts for 41% of output compared to just 12% in the UK. With a world average of 13% China’s relative share is 3.2 compared to the UK’s 0.9. That’s tough competition.

China’s revealed comparative advantage for manufactures is 1.13 compared to the UK’s 0.79. A larger competitor, tough competition, with a significantly higher competitive advantage will provide a difficult challenge.

In financial services, the reverse is true, China’s revealed competitive advantage is 0.03, compared to the UK’s 3.01. The world average is just 0.5. The UK is the strongest player in the world of exports in financial services with the highest revealed comparative advantage. So why not promote and support the sector instead of suggesting an evil imbalance exists within the economy?

Why place so much hope in an ill equipped manufacturing sector in trend decline long before Gandhi promoted homespun? The renaissance just will not happen. Play to your strengths may sound facile in terms of strategy but it should be something even donkeys can grasp.

Notes
The revealed comparative advantage was first proposed by Balassa (1965).The comparative advantage of a country's industry could be revealed by the ratio of the share of an export sector's exports in total exports to that share  for the world. Balasa, Bela 1965 Trade Liberalisation and revealed comparative advantage" Manchester School of Economic and Social Studies Bulletin Vol 33 No 2 pp 99 - 117

Yiping Huang, Bijun Wang Chinese Outward Investment: Is there a China Model. China & World Economy Volume 19 No 4 Jul - Aug 2011

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

China's Foreign Direct Investment : which way does the Renminbi river flow?

Which way does the Renminbi river flow, is it east or west?  An analysis from US based heritage.org into China’s global foreign direct investment between 2005 and 2008 provides interesting reading.  

We have long argued China’s FDI is determined by three issues, access to markets (ATM), access to technology (ATT) and access to resource (ATR). By far and way the greatest determinant is access to resource.

Consider that Australia is the largest single country destination for China’s direct investment according to heritage.org using data from a report first by Scissors [2011]*. Investment is valued at $34 billion and 15% of the total, according to the data.

This investment could be motivated by the market of some 23 million people (ATM) , or possible access to technology (ATT) represented by boomerang flight dynamics perhaps. Far more likely is access Australia’s thriving resources sector particularly minerals and petroleum. Australian coal, liquefied natural gas, iron ore, copper, diamonds, zinc and many other minerals provide the essential incentives for the FDI direction. In 2006–07, over 80 per cent of Australian output was exported, accounting for approximately 49 per cent of total goods and services exports.

Nigeria, Iran, Brazil, Kazakhstan, Canada, Indonesia, Algeria and Venezuela all rank above Britain in the foreign investment rankings. China invests almost twice as much in Nigeria as it does in the UK mainland. Unless copper deposits in Cornwall or zinc in the lakes are discovered, the UK will remain outside of the top ten destinations for Chinese investment.

China is the second largest economy in the world growing at 9% per annum. With a population of 1.3 billion it struggles into the world top 100 in GDP per capita parameter. With $3.2 trillion of reserves, it has the financial resource to lock up the finite resource of world commodities and continues to do so at a vast rate. Almosty eight per cent of investment is into the food, energy and metals sectors.

The challenge for the growing China economy is to secure resource. It is acquiring and developing the technology. It already has the market, the export growth model abandoned post 2008 in favour of domestic expansion. Europe and the West may yet pay for the occupation of Peking. The price is lower growth and higher inflation as demand for resources grows in the East at the expense of the West.

So which way does the Renminbi river flow. The renminbi flows East, West, North and South but the resources flow back just one way. JKA 2011

Scissors Derek, 2011 China's Investment overseas in 2010 Heritage Foundation.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

Why is the Euro so strong, given problems with the Olive branch?

Planning a trip to France or Spain this Summer? Ever wondered why the Euro is so strong against Sterling. With a spot rate around 1.12, one hundred pounds would buy around one hundred and five euros. Living on a fixed pension in Spain, the weakness represents a drop in income of thirty six per cent over ten years. Why is Sterling so weak against the Euro?

According to some the Euro is near collapse with reluctant Franco German support for the Olive branch of the Euro. The currency caution is “Beware of Greeks needing bailouts”, for they will soon be followed by the others in the PIG pen. Portugal, Italy, Greece, Spain are queuing at the trough, the system will collapse say some. From a macro economic and political risk perspective, a strong Euro doesn’t make sense. 

Monetary considerations offer some support given the interest rate disparity between the 50 basis points available in London compared to the 50 basis points deposit facility and a 1.25% available for main refinancing operations available in Euroland. Think of the 2% marginal lending facility from the middle of April and the capital pull makes some sense. 

But the fall in Sterling began long before the interest rate spreads opened up. The Sterling effective exchange rate has fallen by almost 25% since 2008. Examine the charts and the fall in Sterling is not universal. A cable rate (Dollar Sterling) of 1.62 isn’t that bad in 2011. It was actually 1.60 eleven years ago. 

A rate of 1.12 against the Euro is really mis priced. The problem is not Sterling against the Euro, it is the Euro rate against the Dollar. Compare the weakness of the Dollar. It has fallen from 1.18 to around 0.70. A decline of forty per cent. Against the yen, the fall has been almost sixty per cent.  

To understand, look back, in history to the dilemma of the Bank of France at the end of the 1920s. This was the “end of era” phase of Sterling as the world reserve and the last flap for Gold. France with significant sterling holdings had to divest but in a way which didn’t overly damage the exit price. 

Consider China with some $3 trillion of reserves. The Middle Kingdom has to diversify away from the imperilled dollar. The dollar is an end of era reserve currency. Hence the quest for a hybrid option in Special Drawing Rights, SDRs or a return of Keynesian Bancor from the Asean block.

It is estimated that already over 20% of China’s reserves are in the Euro. China has built the longest bridge in the world, not the Qingdao bridge, [pictured] but the financial bridge from Beijing to Berlin. China needs a strong Euro to delay the day when the renmimbi will rule. Hence the offer from Chinese premier Wen Jiabao to buy Euro bonds and landmarks in Greece. Parthenon not the Pound.

The strength of the Euro is a challenge to holiday makers, but it is the weakness of the dollar which is the challenge to policy makers. It is the strength of the Asian economies and China specifically that pose the real policy dilemma for the UK. A sterling recovery may take longer than we think. 

An extract from China - Return of the Middle Kingdom - The impact of China on the world economy. John Ashcroft 2011.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.