As chief investment strategist for Deutsche Bank Private Wealth Management UK, Paul Wharton is responsible for economic and market strategy and the income-oriented portfolios within the bank’s UK onshore discretionary portfolio service. He serves on both the UK and the global investment committees of Deutsche Bank Private Wealth Management. A passionate student of economic history, he has more than 20 years’ experience of investment markets and management. He graduated from University College London in 1985 and trained with Fidelity. He subsequently completed a diploma in business studies before establishing a pensions management business in conjunction with Norwich Union. In the early 1990s Wharton was recruited by Société Générale to develop a UK division serving the rapidly growing market for investors in self-invested personal pensions. In 2003 this business was sold to Tilney Investment Management, which was itself subsequently acquired by Deutsche Bank Private Wealth Management in 2006.
Are there any winners or beneficiaries in the “currency wars” that we are currently witnessing?
We are certainly seeing a “race to the bottom” as growth economies dependent on exports try to weaken their currencies even as continuing weakness in the US dollar drives those currencies upwards. Clearly no exporter likes to see their currency strengthening unduly since it damages their ability to sell in to foreign markets. At the moment China and Germany seem to be the main winners, with Germany coming out rather better than China.
The linkage with the dollar means that the yuan weakens as the dollar weakens, and that helps to make Chinese exports even more price-competitive. However, the big negative consequence of this is that it creates serious inflation in food prices in China since the Chinese have to spend more to buy the same amount of grain. Food prices rose by a third in 2010, and this in turn threatens to lead to social unrest in China. So for them there is a very marked downside to the second round of quantitative easing (QE2) in the United States.
Germany also has its difficulties. On the one hand there is a real irony in the fact that the more the European sovereign debt crisis perturbs the markets and weakens the euro, the more it boosts Germany’s burgeoning export sector. On the other hand, much of the burden for funding the bailouts falls on Germany as the European Union’s biggest economy. However, since the European sovereign debt issues have very little to do with the currency wars, one would have to say that Germany will remain a net beneficiary provided that the dollar doesn’t weaken too much against the euro.
Our official view is that we think that China will allow the renminbi to appreciate by around 4% against the dollar in the medium term and will allow wage costs to rise. That will put more money in the pockets of workers and will also help to rebalance the global economy. We have already seen some quite sharp wage rises in China, and more along these lines would be very helpful.
If the Chinese revalued the renminbi upward, that would lower the cost of their food imports and it would also have the beneficial effect of making the Chinese focus more on domestic consumption, since it would generate some falling off in exports. Manufacturers would have to look to sell the extra capacity locally. We have to remember that the Chinese labor force is 850 million strong. That is more than 20 times the size of the entire UK labor force. Moreover, economic commentators are starting to talk about the end of the global export model, since the big “importer of last resort,” the United States, is running out of steam. It is just a simple economic fact that no country can both deleverage massively and import strongly.
This could, however, be a good thing for China in the medium term, since it should force the Chinese to become much more effective when it comes to deploying their investment cash. China has really got to stop wasting resources. The country looks like a late-cycle version of the Asian tiger economic boom, the problem there being that ever-increasing investment generated ever-smaller rates of return until we were suddenly hit by the Asian crisis of 1998. All investment booms fizzle out if consumption and final demand are not able to keep pace with the capacity that the investment is generating.
What is particularly interesting for me in all these linkages—which we see particularly vividly in the currency interrelationships—is perhaps the unexpected rather unintended consequences of globalization, where everything ends up being linked to everything else. We saw, for example, a problem in US mortgages along with a problem about excess savings in China generating massive capital flows to peripheral eurozone economies. The debt that generated cannot be revalued away, so we now have a very fragile global model.
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