It’s that time again — time to see how clear, or cloudy, my crystal ball was a year ago as 2010 was coming to a close.
Going back in time, China watchers were concerned about the health of the country’s economy at the end of last year, just like they are today. The most commonly voiced concerns were over high property prices, rising inflation, and of course, China’s growth rate. The debate as to whether China would have a “hard” or a “soft” landing raged on, with many pundits predicting that a “property bubble” would bring China’s economy to its knees. Sound familiar?
With that as background, following are the five predictions that I made one year ago for 2011. In the Chinese spirit of self criticism, I have also included my own unbiased assessment of how I did.
Prediction #1: China’s economy will grow at a sustainable 9 percent in 2011.
In response to the global economic crisis, China enacted a large fiscal stimulus program in November, 2008 and opened the lending spigots at the beginning of 2009. Since then, China has been taking measures to reduce its double-digit growth rate in an effort to make the country’s growth more sustainable. At the end of last year, many China watchers believed that the growth in China’s Gross Domestic Product (“GDP”) would slow in 2011 as the government completed the withdrawal of stimulus measures and tightened credit to dampen inflation.
In November, 2010, the World Bank said that China’s economic growth would slow to 8.7 percent in 2011. Similarly, a United Nations’ report predicted that China’s economy would slow to 8.9 percent. While these predictions certainly didn’t represent anything like a hard landing, they were nonetheless at the low end of the range, with many experts predicting that China’s GDP would grow at 9 percent or more.
Never one to believe in doomsday scenarios as far as China is concerned, I decided to go with the majority of the experts and predicted that China’s GDP would grow by at least 9 percent in 2011. China should finish the year in 9 percent territory, earning me the full 20 points on this prediction.
Prediction #2: Inflation will not be a problem in China and the Consumer Price Index (“CPI”) will stay below 3.5 percent.
Giving myself the benefit of the doubt, I can only say that I was partially right on my inflation prediction. It is true that inflation ended 2011 not being a problem. However, it was a very stubborn problem for a good part of the year as each month saw the inflation rate increasing, peaking at 6.5 percent in July.
Because two-thirds of China’s inflation over the past 12 months was food related, the authorities had no choice but to take all measures to bring rising prices under control. Approximately 900 million Chinese still live in the country’s rural economy and have annual average per capita incomes of $900 or so. For this group, food makes up a high percentage of annual household purchases.
Officials battled inflation hard all year, raising both interest rates and reserve requirements, as well as implementing administrative measures to allocate credit. Finally, inflation began to subside in August, and by November, inflation had slowed to 4.2 percent, its lowest rate since September 2010. With China on the downhill side of its inflation battle, the People’s Bank of China was confident enough to reduce bank reserve requirements by 0.5 of a percentage point in November, effectively increasing the amount of money banks can lend.
Nonetheless, higher than expected inflation for most of the year will cause the full year number to be at least 5 percent, well above my prediction of 3.5 percent. Admittedly, I am being very generous to myself during this holiday period, but I’ll take 10 of 20 points on this one for being half right.
Prediction #3: The renminbi will remain pegged to a basket of currencies and will appreciate by 7 percent to 6.1 yuan to the dollar by the end of 2011.
In June 2010, China de-pegged the renminbi from the U.S. dollar, pegging it instead to a basket of currencies. By the end of 2010, the renminbi had appreciated by 3.1 percent against the U.S. dollar, and stood at 6.595 to 1.
I was a bit aggressive in my prediction of 7 percent yuan appreciation in 2011, believing that 3.1 percent appreciation for the final six months of 2010 was indicative of a full rate that China could live with in 2011. I predicted that the exchange rate of the yuan to the dollar would be in the neighborhood of 6.1 to 1 by the end of 2011.
In fact, the yuan closed 2011 at 6.299 to the dollar, about 4.5 percent appreciation for the year. Undoubtedly, the crisis that unfolded in Europe throughout the year, as well as the continued sluggishness of the U.S. economy, caused the government to be less enthusiastic about a greater price appreciation of its currency.
Because 4.5 is 64 percent of 7, I’ll take 13 points on this one.
Prediction #4: The Shanghai Composite Index will increase by 25 percent to 3500 by the end of 2011.
This is one prediction that, by any measure, was a complete whiff.
The Shanghai Stock Exchange Composite Index (“SSE”) tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990 with a base value of 100.
The SSE reached its high of 6036 on October 17, 2007, and then declined precipitously to its low of 1720 on November 3, 2008 in the aftermath of the global economic crisis. After recovering to the 3500 level by mid 2009, the SSE has been flat to trending downward, closing at 2808 on December 31, 2010.
Since its high water mark in late 2007, the SSE has been plagued by concerns as to how China would be impacted by the global economic crisis, the effects of the fiscal and monetary policies that the country enacted, the property bubble and the credit tightening that followed, and the weak economic prospects for the United States and Europe, China’s two largest trading partners.
Believing that inflation would not be a big problem in 2011 (see Prediction #2), I did not foresee the tight credit measures that China implemented all year. With the Federal Reserve pumping massive amounts of liquidity into the economy, and the Bush tax cuts extended before the end of 2010, I believed that the American economy would recover somewhat, improving market sentiment in Shanghai. I was also wrong on that one. Finally, no one could have predicted the near-meltdown in Europe, so I missed that as well. Add it all up, and this prediction was already dead on arrival when I sat down to write my post.
In short, believing that many of the uncertainties that had plagued the Chinese stock market were in the rear view mirror, I predicted that the SSE would break free from the doldrums of the last few years and increase by 25 percent to 3500 in 2011.
In fact, the SSE declined by 22 percent in 2011, ending the year at 2199. Unfortunately, I come away with a big goose egg on this one.
Prediction #5: 2011 will be a banner year for cross-border mergers and acquisitions between China and the United States and China and Europe.
Cross border mergers and acquisitions between China and the rest of the world will be a big story, the kind that makes investment bankers salivate — someday. Chinese companies are cash-rich, need technology and want to be global. For their part, Western companies in slower growth economies are ready sellers, particularly those in basic industries that find it difficult to access Western capital markets.
Unfortunately, 2011 didn’t prove to be the banner year that I predicted. Tight credit markets at home and sluggish markets outside China made everyone cautious. Being completely honest, I can’t say that I earned any points for this prediction. I’ll be right eventually, but not this time around.
With two whiffs, one 20, a 13 and a 10, my score is a lackluster 43 out of a possible 100. If I were a baseball player, a .430 batting average would put me in the Hall of Fame. Being right less than half the time in the predictions business, though, is not good. All I can say is that I’ll try to do better in 2012.
Happy New Year everyone!
