MTD’s 2016 Predictions: How Did We Do?

happy-new-year-2017Events in China usually dominate the news in most years. In 2016, however, China took a back seat to Brexit and the presidential election in the United States. While both have longer term implications for the country, viewers the world over were riveted to their television sets as events unfolded in the U.K. and the U.S.

Nonetheless, the Year of the Monkey was a year of solid progress for China. While the country’s economy sputtered in the first part of the year, it stabilized in the second half, thanks to a stronger real estate market and easier credit. In sympathy with the broader economy, China’s stock market, after plunging by 23 percent in January, began to recover by mid-year. Meanwhile, China’s smaller private companies, which are eight to ten times more efficient than China’s large state-owned companies in creating jobs and four to six times more efficient in generating GDP, continued to access capital on Beijing’s Third Board. While weak exports and a surge in outbound investment put pressure on China’s currency, the two trends signal the transformation of China’s economy to domestic consumption and the internationalization of Chinese companies.

As in past years, MTD made its predictions for 2016 last January, and it is now time to grade our paper so to speak. As it turned out, our predictions for the year were pretty good: we missed completely on only one of five predictions and scored 80 points out of a possible 100. We invite you to read the comments below and make your own judgment.

Prediction #1: China’s GDP will grow between 6.5 and 6.7 percent.

Most forecasts for China’s growth in 2016 fell in the range of 6.3 to 6.8 percent, with the People’s Bank of China (“PBOC”) predicting growth of 6.8 percent. MTD predicted that growth would be slightly lower than the PBOC’s official forecast.

While we won’t know the GDP numbers for the full year of 2016 until later this month, it seems very likely that GDP growth will come in at somewhere around 6.7 percent, the high end of the range that we predicted. Amazingly, GDP growth was reported as 6.7 percent in each of the year’s first three quarters. Therefore, the number for Q4 would need to be significantly higher or lower than that number for full-year growth to be much different. That does not seem likely.

The real story for GDP growth last year was not the number itself, but the fact that growth in each of the first three quarters was exactly the same, fueling speculation that the government was managing the number. Calculations by the economists at Fortune, for example, put the odds of China hitting 6.7 percent in three straight quarters at less than 3 percent. Many economists believe that China inflated its GDP earlier in the year when they believe China’s economy was weaker than reported, and downplayed growth later in the year when growth had strengthened.

Whatever the case, MTD nailed this prediction and will happily award itself 20 points.

Prediction #2: China’s currency will continue to be soft in 2016, and the ratio of 6.1 yuan to the dollar reached in late 2013 will be the high water mark for this decade. Expect more currency liberalization in 2016.

MTD based its prediction for the currency on its belief that the renminbi is on a path to becoming a fully convertible currency by 2020. Several events seem to point in this direction. Over the past several years, China has signed bilateral currency deals with over 20 countries in order to increase the circulation and demand for the renminbi outside China, and as of October 1, 2016, the renminbi is included in a basket of currencies that make up the International Monetary Fund’s Special Drawing Right — along with the U.S. dollar, the Euro, the Japanese yen, and the British pound. MTD believes that further measures to free up currency flows in and out of China will be implemented in the coming years.

Weak export sales and dramatic increases in overseas direct investment (“ODI”) put further downward pressure on the yuan in 2016. In September, exports dropped 10 percent year-over-year, marking the sixth consecutive monthly decline, and in the January to October period, ODI increased by 53.3 percent to US$146 billion, easily surpassing the total for all of 2015. The combination of all of these factors caused the yuan to fall against the dollar throughout the year, beginning 2016 at 6.49 yuan to the dollar and ending the year at 6.95.

Again, MTD nailed this prediction and will take another 20 points.

Prediction #3: China will embrace further financial and market reforms to encourage flows of domestic and foreign capital into its stock markets. An important target is the $21 trillion of deposits now sitting in China’s banks.

China’s problem is simple: How to re-circulate the vast amount of capital that already exists in the country to the companies and people that can use it best. MTD predicted that China would embark on further stock market reforms in 2016 that might include an expansion of Shanghai-Hong Kong Connect and the further development of the Beijing-based National Equities Exchange and Quotations (NEEQ), which was founded in 2012.

Progress was made on all fronts. On December 5, the long-awaited Shenzhen Hong Kong Stock Connect became a reality in 2016, and Hong Kong investors can now buy and sell shares in Shenzhen as well as in Shanghai. In the face of a declining stock market, efforts by the China Securities Regulatory Commission to stabilize China’s $6.1 trillion equity market by limiting deal sizes for initial public offerings (IPOs) seemed to work and IPOs performed well in aftermarket trading. Finally, from August 2015 to August 2016, the number of companies listed on NEEQ surged by 157 percent to 8,622, compared to 2,914 companies listed on the Shanghai and Shenzhen stock exchanges. Through August, the NEEQ provided 78.2 billion yuan (US$11.3 billion) to China’s cash-hungry smaller companies.

In a year when the Shanghai Stock Exchange Composite Index (“SSE Composite Index”) was down, China made good progress in developing its capital markets. Another 20 points for Prediction #3.

Prediction #4: Recent declines notwithstanding, the SSE Composite Index will end the year higher.

The SSE Composite Index closed 2015 at 3573, but then proceeded to plunge seven percent on the first day of trading in the New Year. The rout continued throughout the month, and the SSE Composite Index ended January at 2738, down 23 percent. When MTD made Prediction #4, the SSE Composite Index was already 10 percent in the hole.

Despite the terrible drop, we thought that the steps China had taken with Shanghai-Hong Kong Connect, deposit insurance and interest rate cuts would enable the market to recover and close 2016 on an uptick.

Unfortunately, that didn’t happen. While the market started to show signs of life by mid-year, the SSE Composite Index only managed to crawl back to 3,104 by the end of 2016, down 13 percent on the year.
While we’re tempted to award take a couple of points for our bravery in making this prediction in the first place, we cannot do so in good conscience. A whiff on this one and zero points.

Prediction #5: The combination of connectivity and demand for new energy vehicles (“NEVs”) promises to transform the competitive landscape in China’s auto industry, tilting the playing field in favor of the local players.

The connectivity and NEV story is one that will play out over a number of years, but the transformation of China’s auto industry that MTD predicted gained steam in 2016.

It’s estimated that 200-plus companies, many backed by large, well-known companies and a number of China’s billionaires, have been formed and are busily working on developing 4,000 new models of electric vehicles. While most of these new entrants are going forward without an official license to manufacture and sell cars in China, five new EV manufacturing licenses were approved by China’s National Development and Reform Commission in 2016 — all for local players.

Due to their long history producing cars, the international auto giants have dominated the Chinese passenger car industry through joint ventures with local companies. However, demand for connectivity and NEV’s is attracting new players to the industry and spawning partnerships between many of China’s most powerful internet firms and the country’s local car producers. New players like Alibaba, Baidu, Tencent and LeEco bring substantial capital, knowledge of consumer electronics, experience and success in China, and extensive relationships throughout the country. As they develop, some could become new leaders in the Chinese and global auto industry.

This prediction also deserves a full award of 20 points in our opinion.

We’ll have our predictions for 2017 shortly. Happy New Year!

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