2019 Predictions: How Did We Do?

The trade war between China and the United States that erupted in March, 2018 impacted all things China in 2019. China’s stock market, currency, and economy were affected, and the fear that the disagreement on trade would permanently damage the relationship between the two countries hurt consumer confidence, which in turn, adversely affected purchases of large consumer items such as automobiles. It’s no wonder that auto sales were down by 8.2 percent, the first decline in over 25 years.

Going into the New Year, MTD had good reasons to believe the trade war would end by mid-year. As a result, four of the five predictions for the year dealt in one way or another with an early end to the dispute. While the relationship between China and the United States appears to be on the mend with the signing of the phase one trade deal on January 15, MTD’s timing was way off.

Prediction #1: The trade war between the United States and China will be successfully resolved. While all of the issues between the two countries may not be resolved by March 1, the deadline for the truce will be extended as needed. By June 30, the trade war will be history.

Despite the imposition of new tariffs by both the United States and China throughout the year, a positive dinner between President Donald Trump and President Xi Jinping of China in Buenos Aires on December 1, 2018 touched off a series of positive actions by both countries early in the New Year, providing hope for an early end to the dispute. After numerous rounds of negotiations in both Beijing and Washington, talks abruptly broke down in May when the Chinese negotiators backtracked on their agreement to write into law the commitments made to the United States.

The legalistic approach taken by the U.S. negotiators was flawed from the start—-anyone doing business in the country knows that writing an agreement into law merely begs the question as to how the agreement is enforced—-and plagued negotiations until the announcement of the phase one deal in December. It is interesting to note that the legalistic approach was scrapped in the phase one agreement in favor of a provision that provides for dispute resolution that looks more like bilateral arbitration. Unfortunately, it took an extra six months for the U.S. negotiators to realize this important point and adjust their approach to one that has a chance of working in China.

At the risk of being accused of parsing words, MTD will take 5 points for Prediction #1. The first sentence in our prediction says that the dispute between the two countries would be “successfully resolved,” which is proving to be correct. Unfortunately, MTD was off the mark in predicting that the trade war would be history by June 30.

Prediction #2: China’s stock market will regain at least one-half of the ground it lost in 2018.

In 2018, the Shanghai Stock Exchange Composite Index (“SSE”) was down 26.5 percent and closed the year at 2494, its lowest level since November 2014. Shares on the smaller Shenzhen Stock Exchange fared even worse, falling by 33.2 percent. The combined capitalization of the two exchanges lost $2.4 trillion during the year. Tightened credit due to deleveraging efforts by the Chinese government and the ongoing trade war between China and the United States were the main culprits.

Even without a successful resolution of the trade war, it seemed that China’s stock markets were well oversold going into 2019. As a result, MTD felt confident predicting that the SSE would recover at least one-half the value it lost in 2018 and rise 18 percent to 2,943. In fact, the SSE closed 2019 at 3050, almost 4 percent higher than our prediction.

The advantage of making numerical predictions is that there is no question whether the prediction is correct or not. MTD deserves full credit of 20 points for Prediction #2.

Prediction #3: U.S. exports to China will set new records and increase by 15 to 30 percent in 2019, depending on the date when the trade war finally ends.

In 2018, the United States exported $120.1 billion of goods to China. Due to the fact that the trade war was not resolved by mid-year as MTD predicted, U.S. exports to China fell to just under $110 billion last year. U.S. export performance in 2019 was far below even the low end of our prediction for the year, which would have meant exports of $138.1 billion.

Again, numerical predictions leave little room for subjectivity when evaluating the accuracy of a prediction. MTD struck out on Prediction #3.

Prediction #4: The renminbi, China’s currency, will trade in a range of from 6.5 to 7.0 to the US Dollar in 2019.

After strengthening to 6.27 to the US dollar in April, 2018, the ongoing trade dispute with the United States caused the yuan to weaken to 6.88 by the beginning of 2019. Even with a successful resolution of the trade war, it was difficult for MTD to see the yuan strengthen beyond 6.5 to 1 in 2019. Because China seemed to have drawn a line at 7.0 to 1, MTD also did not believe that China’s currency would weaken beyond that point. In point of fact, the yuan traded in the predicted range for most of 2019 and closed the year at 6.96 to 1. However, the currency did trade above 7.0 to 1 in August, September and October of 2019, hitting 7.17 to 1 on September 3rd.

Because MTD’s Prediction #4 was correct in nine out of the 12 months in the year, 15 points will be awarded for its currency prediction.

Prediction #5: New Energy Vehicle (NEV) sales will reach 2.0 million units in 2019, widening China’s lead in the global electric vehicle industry.

In 2018, China’s sales of NEVs, which include battery electric vehicles, plug-in hybrids and fuel-cell cars, nearly doubled to 1.2 million units, making China once again the clear leader in the global electric vehicle industry. Growth of China’s NEV industry has been driven historically by a robust consumer subsidy program that provided cash subsidies to consumers of up to $10,000 toward the purchase of an NEV.

In 2019, China substantially reduced consumer subsidies and began implementing a program to completely phase them out. Instead of using government funds to subsidize the cost differential between NEVs and cars powered by internal combustion engines, China is putting in place various regulations that, in effect, shift the burden to the automakers. Car makers must now produce fleets with increasingly more aggressive fuel efficiency standards. In addition, beginning in 2019, automakers had to earn points equivalent to 10 percent of the vehicles they imported and produced in China by selling NEVs. Under the new system, automakers earn super credits for the production of NEVs and energy saving vehicles. The percentage required for 2020 will rise to 12 percent.

In combination with the worst China auto market in decades, the new rules and the substantial reduction in consumer subsidies had a substantial adverse impact on the growth rate for NEVs in China. Rather than registering another substantial increase, sales of NEVs fell by four percent compared to 2018. However, NEV sales were soft throughout the world in 2019 and China remains the undisputed leader.

2019 was a terrible year for China autos and NEV sales were no exception. Another strikeout and zero points for MTD’s Prediction #5.

Adding it all up, MTD had its worst year for predictions since 2011 when it scored a meager 43 points. With 5 points for Prediction #1 on the Trade War; 20 for Prediction #2 on the stock market; and 15 for Prediction #4 on the currency, MTD’s total of 40 points represented a new all-time low of 40 points. Stay tuned for our 2020 predictions, coming soon.

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