Wrapping Up The Year Of The Dragon

Happy new year

Happy new year (Photo credit: Amodiovalerio Verde)

Self-criticism is an essential element of critical thought that many regard as healthy and necessary for learning. From a purely medical point of view, engaging in self-criticism activates areas of the brain that are responsible for processing error detection and correction. In China, self-criticism is one of the oldest Confucian practices.

Every year at this time, I practice my own form of self-criticism when I look back and critically analyze the accuracy of my predictions for the year that has just passed. Following is my assessment of how I did in 2012.

Prediction #1: China’s economy will grow at 8.5 percent.

It seems like ages ago that so many experts were debating whether China would have a “hard” or a “soft” landing, with many making doomsday predictions for the country’s economy. The bursting of a “property bubble,” inflation and the change in leadership that was about to take place were among the reasons cited as causes for concern. Well regarded economists like Nouriel Roubini of New York University openly worried that China’s growth could sink to 5 percent or less in 2013 or 2014.

In this context, I was so confident that China was not headed for a hard landing that I viewed this prediction as a “gimme.” Unlike any other country in the world, the Chinese government has almost full control of the monetary, fiscal and administrative levers that control its economy, and the government pulls on those levers based on purely economic, not political, considerations. As evidenced by the way in which China rapidly shifted from monetary and fiscal tightening to monetary and fiscal ease in October 2008 and successfully navigated the global financial crisis, the government has had a generally good track record of manipulating those controls.

With an overriding concern for the growth of its economy at the forefront, it was inconceivable to me that China’s leadership would allow a hard landing to occur, without first pulling out all stops. As it turned out, growth was, in fact, lower than expected, but China’s leadership resisted the temptation to re-stimulate with increased spending in an effort to wean the Chinese economy away from an over-dependence on government spending. While growth declined steadily with each passing quarter, China did not land with a thud as many predicted.

According to China’s National Bureau of Statistics, gross domestic product (GDP) in the first three quarters of 2012 increased by 7.7 percent. Specifically, growth was 8.1 percent for the first quarter, 7.6 percent for the second quarter and 7.4 percent for the third quarter. With growing signs that China’s economy bottomed in the third quarter, GDP growth will likely fall somewhere between 7.7 and 8.0 percent for the year.

While my prediction of 8.5 percent growth proved a bit too optimistic, I was more right than those who predicted a hard landing. For that, I’ll take 15 out of a possible 20 points.

Prediction #2: By the end of 2012, the words “property bubble” will no longer be in the vocabulary when discussing China’s economy.

Depending on the year, overly pessimistic China observers have predicted that the country’s economy would implode due to regional differences that would cause the country to break apart; a high level of non-performing loans at China’s banks; political instability; or most recently, the bursting of a property bubble. One by one, all of these predictions have been disproven, and the Chinese economy has continued its steady upward trajectory. The fear about a property bubble in China is only the latest in a series of Achilles heels in China’s economy that has been cited as the trigger that would ultimately end the Chinese economic miracle.

Unlike the experience of many countries around the world, the fiscal and monetary policies that China implemented in response to the global economic crisis actually worked. In fact, they worked so well that property prices in China surged in 2009, and inflation began to be a problem in mid-2010.
This did not go unnoticed by the government. In the spring of 2010, China began restricting credit and raising interest rates and reserve requirements to stabilize rapidly rising property prices. When inflation reared its ugly head later that year, the government re-doubled its efforts. As a final measure, the government slapped housing purchase policy restrictions in 43 major Tier 1 and Tier 2 cities in early 2011. These restrictions included limits on the number of units that households can buy, curbs on purchases by non-residents and higher deposit requirements for home buyers.

As a result of all of these policies, inflation peaked in July, 2011 at 6.5 percent and property prices have stabilized. By the end of 2012, inflation was well below 2.0 percent, and housing prices in 100 major Chinese cities rose for a sixth consecutive month in November, further evidence that the nation’s housing market is regaining its health.

While I still get the occasional question about China’s property bubble, this issue is no longer front and center. In my opinion, this prediction deserves a score 20 out of a possible 20 points.

Prediction #3: The Shanghai Stock Exchange Composite Index (“SSE”) will increase by 25 percent in 2012.

Have you ever watched your favorite football team fall hopelessly behind during the first three quarters of the game, begin to rally in the fourth, only to have the clock run out before it could score the winning touchdown? That’s the way I feel about this prediction.

The SSE, which tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange, closed 2011 at 2173.56, down almost 23 percent on the year, and seemed poised to recover in 2012.

After reaching its all time high of 6036 on October 17, 2007, the SSE 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 had been flat to trending downward ever since. 2012 seemed to be the year when the SSE would reverse course.

Instead, the talk about slowing growth in China, restrictive credit and uncertainty about the leadership change had a negative impact on Chinese investors and the SSE was one of the worst performing stock markets in the world for most of the year, declining by almost 10 percent to its low of 1959.77 on December 3rd. Like your favorite football team, though, the SSE suddenly came alive in December and gained almost 16 percent during the month to finish 2012 at 2269.13. When the dust settled on December 31 in Shanghai, the SSE was up just over 4 percent on the year. Unfortunately, it was too little too late to salvage my prediction of a 25 percent increase.

While I was clearly wrong in the size of the gain predicted for the SSE, I was right about the direction of China’s stock market. Giving myself the benefit of the doubt on this one, particularly given the SSE’s impressive performance in December, I’ll take 10 of 20 points.

Prediction #4: Before the year is out, China will extend financial support to the European Union.

China has been using its economic might, not military prowess, to extend its influence throughout the world. Therefore, I thought that the ongoing crisis in Europe presented too great an opportunity for China to pass up to gain influence in the European Union, its second largest export market. In fact, Wen Jiabao, China’s outgoing premier, seemed to signal the country’s intentions in a speech at the World Economic Forum in Dalian in 2011 when he called on European countries to put their “own houses in order before asking China for a bail-out.” Wen then linked any possible Chinese investments with long-standing political demands.

Europe muddled along all year, avoiding a cataclysmic event, and China watched on but did not act. I was dead wrong on this prediction and cannot claim any of the 20 points.

Prediction #5: Sino-American relations will deteriorate.

Unfortunately, this prediction proved all too true. During 2012, the Obama Administration filed three separate trade complaints against China in the World Trade Organization (WTO). One complaint charged China with restricting its exports of rare earths, while the other two complained that China was unfairly subsidizing its exports of automobiles and automobile parts. In retaliation, China filed two of its own WTO complaints against the United States during the year. As far as trade, the relationship between the two countries could be better, to say the least.

On Chinese investment into the United States, suspicion runs high in political circles. In late September, President Barack Obama blocked a privately-owned Chinese company from building wind turbines close to a Navy military site in Oregon due to national security concerns, the first time since 1990 that a president formally blocked a deal on national security grounds. In October, the House Intelligence Committee released a report on “national security threats” posed by Huawei Technologies Co. Ltd., the world’s second-biggest maker of routers, switches and other telecommunications equipment, and ZTE Corp. (HKSE: “0763.HK”), its smaller rival, and effectively blackballed both Chinese companies from expansion in the United States. Finally, as of the end of 2012, the Committee on Foreign Investment in the US (CFIUS), a group of government agencies chaired by the US Treasury Department, has not approved Wanxiang Group’s purchase of A123 Systems, Inc. (OTC Markets: “AONEQ”), despite the fact that a Delaware bankruptcy court has already approved the purchase.

By the end of the presidential campaign, both presidential candidates were trying to outdo each other as far as being tough on China. President Obama’s actions spoke for themselves, while Mitt Romney, the Republican presidential nominee, promised that one of his initial executive orders on his first day as president would be to “clamp down on the cheaters” by slapping duties on Chinese imports if Beijing doesn’t move quickly to float its currency.

The best that can be said about the Sino-American relationship is that it is non-existent. While publicly cordial, the two largest economies of the world do not have a meaningful dialogue with respect to any of the important issues facing the world. Regrettably, I’ll take 20 points on this prediction.

Adding it all up, my predictions for 2012 scored 65 out of a possible 100 points, providing me with the perfect New Year’s resolution— improve my performance in 2013!

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