2013 Predictions: How Did We Do?
As another year draws to a close, it’s time to take stock and to see just how clear our crystal ball was last January.
With new leadership in place, general economic uncertainty and the overhang of the Bo Xilai trial, there were plenty of questions about China as we entered 2013.
The audiences that I spoke to in December in New York, Philadelphia, Anchorage, Cincinnati, Pittsburgh and Reno included participants from a wide range of occupations — from hedge fund and investment managers to ordinary investors, business men and women, students and government officials — and their questions echoed those of many. I did my best to outline the road ahead for China in the answers that I gave and in my predictions for the year. How did we do? Let’s see.
Prediction #1: China’s new leadership will accomplish a smooth transition of power in their first year of governing and will largely continue on the same path as their predecessors.
The team of President Xi Jinping and Premier Li Keqiang assumed the reins of power in October, 2012 and everyone wondered how they would fare in the new year. The Bo Xilai affair complicated the transition of power, leading many to suggest that it was evidence of an internal struggle within China’s Communist Party.
Relying on the fact that both President Xi and Premier Li were understudies to their predecessors, as well as the positive opinions expressed by the Chinese I spoke with and experts such as Stephen S. Roach, a member of the faculty at Yale University and an experienced China hand, I was quite sanguine and concluded that China was in “good hands” under its new leaders, and that the next 10 years would be a continuation of past policies, with some new initiatives to correct imbalances.
After a year in power, China’s new leaders are generally getting high marks. For example, Zhengxu Wang, Associate Professor at the School of Contemporary Chinese Studies and Deputy Director of the China Policy Institute, University of Nottingham, concludes that the transition of power was far more complete and clear cut than 10 years before and that Xi and Li have proven to be “doers.”
Similarly, Cheng Li, Director of Research at the John L. Thornton China Center, cites an old Chinese saying that “A new leader lights three bonfires,” and concludes that Li’s three bonfires—the vigorous anti-corruption campaign, the successful conclusion of the Bo Xilai trial and the comprehensive and deeper market reforms embraced at the third plenum — have granted him much needed public support.
It’s still early, but all seems to be going well. I’ll give myself 20 points for this prediction.
Prediction #2: China’s Gross Domestic Product (GDP) will grow faster than it did in 2012, ending several years of a declining growth rate.
After increasing from 9.1 percent in the post crisis year of 2009 to 10.4 percent in 2010, China’s GDP growth rate declined to 9.3 percent in 2011 and fell to 7.8 percent in 2012. “Will the decline in China’s growth rate continue in 2013?” was one of the most frequently asked questions on my travels through the United States at the end of last year. Persuaded by widespread opinion that China’s economy had bottomed in the 2012 third quarter, I predicted that 2013 would be the year in which China would resume the growth in its growth rate. I felt quite comfortable making this prediction because I was in good company.
Lu Zhongyuan, Deputy Director of the Development Research Center under the State Council, said that there is “no doubt” that China’s economy will grow by more than 8 percent in 2013. Likewise, the World Bank predicted that China’s economy will grow by 8.4 percent, and Andy Rothman, China Macro Strategist for CLSA, said that 8 plus percent growth is “on the horizon” for the coming year.
I was wrong.
According to the Xinhua News Agency, an end of the year State Council report to China’s legislature said that the expected 7.6 percent growth in GDP in 2013 would mark the third straight annual drop in China’s expansion rate. Xu Shaoshi, Minister in charge of the National Development and Reform Commission, told the legislators that: “We cannot deny a downward pressure on economic growth.” The State Council document listed among the looming challenges a worsening in pollution and social conflicts. Xu said further that the nation’s traditional growth pattern is challenged by rising labor and environmental costs.
My prediction was unequivocal, leaving me little wiggle room to claim at least partial credit. I’ll have to take a zero on this one.
Prediction #3: The Shanghai Stock Exchange Composite Index (SSE) will register a double digit increase in 2013, rewarding investors for their patience.
At the beginning of the year, 2013 looked so promising as far as China’s stock market. Many believed that the country’s economy had bottomed (see “Prediction #2” above), and then the SSE came alive in December, gaining almost 16 percent during the month to finish the year at 2269.
Unfortunately, I was wrong again. After reaching 2434 on February 6, its high for the year, the rally fizzled and the SSE has been on a downward trend ever since, closing the year at 2116.
What ails China’s stock market? Who knows, but it’s been one of the worst performing in the world. Since late 2007 when the SSE reached its high water mark of 6036, China’s stock market has been plagued by a myriad of concerns— the global economic crisis, a property bubble, credit tightening, weak economic prospects for its two largest trading partners, and lately, uncertainty about the leadership transition. Amidst these concerns, the SSE declined by 11 percent in 2010 and 22 percent in 2011. Only a strong December rally enabled the SSE to reverse the trend and close up 4 percent in 2013. While the U. S. stock market seems to be making new highs almost every day, the SSE has been essentially flat since June 2001.
Until I can better understand what is ailing the market, my New Year’s resolution is to stop making predictions about China’s stock market. Another goose egg.
Prediction #4: China will continue to slow its purchases of U.S. Treasury securities.
The data is mixed and requires some explanation and interpretation to determine how this prediction turned out.
From an absolute numbers point of view, China continued its purchases of U.S. Treasury securities in 2013. By the end of October, 2013, China had increased its holdings of U.S. Treasury securities by $84.1 billion, up from $1,220.4 billion at the end of 2012 to $1,304.5 billion. While many predicted that 2013 might be the year in which Japan surpassed China as the largest foreign holder of U.S. treasuries, China remained in the lead position as of October.
Historically, however, China’s purchases have definitely slowed, even taking into account this year’s increase. From the end of 2003 to the end of 2010, China’s holdings of U.S. Treasury securities grew from $159 billion to $1.166 billion. Since then, the pattern has been much different. Over the past three years, China’s holdings of U.S. debt have been flat to declining. In fact, between September 2011 and September 2012, China reduced its holdings of U.S. Treasury debt by 9 percent, from $1,270 billion to $1,155 billion. China’s holdings today are only $35 billion higher than they were two years ago.
On a relative basis, China’s purchases are also slowing. The $84.1 billion increase in China’s holdings of U.S bills, notes and bonds represents only 23 percent of the $366 billion increase in its total foreign currency reserves so far in 2013. When taking into account the fact that the US dollar continues to be the dominant global currency, accounting for 87 percent of global-trading volumes, China’s holdings of U.S. treasuries are clearly becoming less significant in its overall portfolio.
The results are admittedly mixed, but this prediction is more right than wrong. I’ll take 15 points.
Prediction #5: China will continue its efforts to internationalize the yuan in 2013.
While full convertibility of the yuan is still several years away, China has been quietly building demand for its currency outside China and internationalizing its role in the global economy.
The process began in November 2010 when Russia and China announced that the two countries would use their own national currencies for bilateral trade, instead of the U.S. dollar. The yuan started trading against the ruble in the Chinese bank market in Shanghai, and in December 2010, began trading on the Moscow Interbank Currency Exchange, marking the first time that the yuan has traded outside of China and Hong Kong.
A year later, China agreed to a deal with Hong Kong that gave the territory more access to the Chinese currency, enabling Hong Kong to access 400 billion yuan ($63 billion) from the Chinese central bank. At the end of 2011, the Japanese government announced that Japan and China will promote direct trading of the yen and yuan without using dollars.
A string of trade/currency deals followed in 2012. In March, China struck a deal with Australia that allows for an exchange of local currencies between the central banks of the two countries. In June, a similar deal was struck with Brazil, and in August, Germany and China announced that the two countries plan to conduct an increasing amount of their trade in euros and yuan. In addition to deals with its largest trading partners, China also concluded similar arrangements with the United Arab Emirates (UAE) and Turkey in 2012.
In 2013, China turned to the “Old World” economies. In October, Europe and China agreed to a currency swap deal, valued at 350 billion yuan ($57.5 billion) to boost trade and investment between the regions.
In June, China struck a similar agreement with the Bank of England worth up to 200 billion yuan ($32.8 billion), which was then followed in October by an agreement whereby China will open its capital markets to overseas yuan business from the U.K. In the October agreement, China approved an 80 billion yuan ($13 billion) quota for London investors to buy Chinese stocks under the Renminbi Qualified Foreign Institutional Investor scheme.
The internationalization of the yuan is an ongoing trend that continued to play out in 2013 and will continue in the coming years. I’ll take full credit for this prediction.
Twenty points on the leadership question; zero for both the GDP and SSE predictions; 15 for the U.S treasuries prognosis; and 20 for the yuan internationalization prediction add up to a score of 55 out of a possible 100 points. Not too bad considering how complicated China can be, but we’ll see if we can do better in 2014. Happy New Year to all of MTD‘s readers!