2020 Predictions: How Did We Do?

In 2008, I began making five New Year Predictions for China on my blogsite, Managing the Dragon, and every year since, we have taken the time to look back and grade ourselves on their accuracy. While it may be considered somewhat arbitrary for us to grade our own paper, we try to be as objective as possible in assigning a score of from zero to twenty points for each prediction.

Last January, which now seems like ages ago, there were no signs that 2020 would hold any particular surprises. The Phase One Agreement (the “Agreement”) between China and the United States was signed on January 15, and the Trade War between the two countries, which had dominated the headlines in 2018 and 2019, appeared to be winding down. With trade tensions between the world’s two largest economies easing, there seemed to be general optimism about what the New Year would bring.

The ink was barely dry on the Agreement, however, when news of a highly contagious virus from Wuhan, China began to dominate the headlines. By the beginning of February, China---and the rest of the world---was in a completely different place. Given what has transpired since the coronavirus came on the scene, it would seem that any predictions made at the beginning of the year would have little chance of being accurate. Despite the dramatic change in circumstances, however, MTD did not fare too badly.

Prediction #1: The Phase One Trade Agreement will be successfully implemented in the New Year, and an agreement on Phase Two will be reached by year-end.

After a careful reading of the Agreement, MTD concluded that it had a good chance of being implemented, leading to a Phase Two agreement at the end of the year. The Agreement included a sensible dispute resolution mechanism that called for quarterly meetings between senior leaders of the two countries to monitor implementation and to discuss and resolve any violations. While the $200 billion of additional imports of U.S. goods and services called for in the Agreement seemed like a high bar, the fact that China is a net importer of agricultural products and energy and has the ability to effect such purchases through its large state-owned enterprises seemed to make its achievement possible.

Unfortunately, COVID 19 completely overshadowed implementation of the Agreement as leaders in both China and the United States turned inward to combat the virus. At this point, we are not aware that anyone is even tracking compliance with the Agreement. With a new administration in place in Washington, and the Trade War a distant memory, there is no mention of Phase Two. Zero points for Prediction #1.

Prediction #2: During the first half of 2020, negative news about the coronavirus will cause the renminbi, China’s currency, to trade in the range of 6.75 to 7.2 to the US Dollar. In the second half, MTD predicts a trading range of 6.5 to 7.0 to the US Dollar.

Over the past five years, the yuan has been relatively stable, trading in the range of ￥6.5 to ￥7.0 to $1 for most of the period. Other than a number of months in 2015, and a brief period in 2018, when the currency traded as low as ￥6.0 to the dollar, and three months in 2019 when it traded above ￥7.0 to $1, the yuan has been between ￥6.5 and ￥7.0 to $1. During 2019, when trade negotiations between China and the United States were at their rockiest, the renminbi never traded above ￥7.17 to $1.

In 2020, China closed down for much of the First Quarter as a result of the coronavirus, and the country’s economy contracted by 6.8 percent as a result. Because the rest of the world had not yet begun feeling the impact of COVID 19, China’s economy, on a relative basis, seemed liked a bad bet, and the yuan traded down as a result. On May 24, the yuan reached its low point when 7.14 yuan were required to purchase one U.S. dollar.

By the beginning of March, China’s economy began opening up, and the country entered into what has become a V shaped recovery. China’s GDP grew by 3.2 percent in Q2; 4.9 percent in Q3; and 6.5 percent in Q4. Meanwhile, the rest of the world began feeling the economic impact of the coronavirus, and China’s economy began to look very attractive by comparison. As a result, the yuan strengthened throughout the second half of 2020, closing at ￥6.45 to $1.0 on December 27.

On the currency issue, MTD’s Prediction #2 was near perfect and worth 20 points.

Prediction #3: The Shanghai Stock Exchange Index (“SSE”) will recover somewhat in the second half and end the year at or above 3200, a modest five percent increase for the year.

At the start of 2020, MTD was relatively bullish on China’s stock market and believed that the SSE would recover all of the ground it lost in 2018. However, just as MTD’s 2020 predictions were going to press in late January, the SSE sold off dramatically. As a result, MTD modified its outlook and predicted only a 5 percent increase.

As it turned out, MTD’s original instincts were correct. As China’s economy began to recover, so did its stock market. SSE closed 2020 at 3,473, up 12.6 percent for the year and exceeding MTD’s prediction of 3200 by a comfortable margin. MTD was correct directionally, but not bullish enough, and will take 15 points for Prediction #3.

Prediction #4: Auto industry sales in China will continue to decline in 2020, falling a further 2.0 to 5.0 percent during the year.

As the First Quarter of 2020 unfolded, and unit sales of cars, trucks and buses fell by 18.7 percent, 79.1 percent and 43.3 percent in January, February and March, respectively, Prediction #4 looked as though it would fall far short of the mark. However, as China returned to work in April, and the country’s economy moved into V-shaped recovery mode, the fortunes of China’s auto industry improved on a monthly basis, and ended the year down by a mere 1.9 percent. While passenger cars were down by just over six percent in 2020, trucks of all sizes were the big winners, with truck sales surging by almost 22 percent.

It was admittedly a bit of a roller coaster, but Prediction #4 deserves the full allocation of 20 points.

Prediction #5: New Energy Vehicle (“NEV”) sales in China will resume growth, with sales increasing by 20 percent in 2020.

Due to the double whammy of the pandemic and a reduction of consumer subsidies for the purchase of NEVs, gains in the sale of NEVs were not as great as MTD predicted. Instead of increasing by 20 percent, 1.4 million NEVs were sold in China in 2020, which represented a 7.5 percent increase over the prior year. For being only partially correct, MTD will take 7.5 points for Prediction #5.

Over the years, MTD’s scores have ranged from a low of 40 in 2019 to a high of 85 in 2015. When the scores for all five predictions are tallied, MTD’s score for 2020 totaled 62.5 points.