There has never been more uncertainty regarding the relationship between the United States and China than there was at the beginning of 2017. A new U.S. president had been elected and was about to take office—a president who had singled out China during his campaign as a country that had built its economy on the backs of the American worker by out-negotiating America’s leaders.
During his campaign, candidate Donald J. Trump railed against currency manipulation by the Chinese; hinted at punitive import duties on Chinese goods; and flirted with the idea of a border tax that would impact all imports into the United States. President-elect Trump’s “America First” agenda certainly seemed to signal a rocky road ahead for the Sino-American relationship.
Apart from its direct impact on the relationship between the two largest economies in the world, many believed that Trump’s election would adversely affect the U.S. economy itself. One day after Trump was elected, Paul Krugman, a Nobel Prize winning economist, led the chorus of economic doomsayers when he stated that Trump’s unpredictability would be particularly damaging to an already fragile economy, spelling disaster for America and the world. Krugman went on to famously say that the financial markets would “never” recover from Trump’s election. Similarly, business tycoon Mark Cuban predicted that the stock market would crash if Trump won the presidency. From China’s point of view, a weak U.S. economy would threaten already soft exports to its largest trading partner.
Given the importance of the Sino-American relationship, three of the predictions by Managing The Dragon (‘MTD”) for 2017 dealt directly or indirectly with the relationship between the two countries, and two dealt with issues specific to China. In general, MTD did well on the former, and not as well on the latter.
Prediction #1: With a stronger US economy, China’s exports will stabilize in 2017, despite fears of what a Trump presidency might bring.
In 2016, exports from China to the United States declined by four percent from $483 billion to $463 billion, and there was concern that a weak U.S. economy would cause further declines in 2017.
One of President Trump’s first actions was to begin cutting regulations, particularly at the Environmental Protection Agency where regulatory overreach had stymied business expansion. Combined with the prospects for a cut in corporate taxes later in the year, and a general rise in consumer confidence, the U.S. stock market soared and the economy broke through what many had come to believe was a three percent ceiling on growth. In the second quarter, real Gross Domestic Product (“GDP”) increased at an annual rate of 3.1 percent. Growth in the third quarter followed with growth at 3.2 percent.
Due to a strengthening economy, China’s exports to the United States began to grow in March, and through November totaled $461 billion, nearly equal to China’s exports to the United States for all of 2016. If exports in December equal or exceed the monthly level of $48 billion achieved in October and November, China’s U.S. exports could exceed a record $510 billion in 2017, an impressive increase of more than ten percent over 2016.
MTD deserves 20 points and full credit for this prediction.
Prediction #2: The renminbi will end 2017 trading in the range of 7.0 to 7.5 to the US dollar.
Because China’s growth in exports to the United States were slowing, and Chinese companies were investing record amounts of capital overseas, China’s currency began weakening from the beginning of 2016. By the beginning of 2017, the yuan was trading at about 6.85 to the US dollar and seemed to be headed even lower.
In its prediction for 2017, MTD noted:
All of the pressures on China’s currency appear to be to the downside, and MTD does not see anything that will change the scenario of a weaker yuan in 2017. While we believe that exports will stabilize, they will not grow as in past years; Chinese companies and investors will continue to diversify their holdings by investing outside the country; and the dollar will continue to strengthen as the Federal Reserve raises interest rates.
MTD was wrong on this prediction. Beginning in April, the yuan began to strengthen and is now trading at 6.48 to the US dollar. Stronger exports to the United States, plus aggressive actions by the Chinese government to restrict the outflow of capital combined to reverse the weakening of the renminbi. In the face of record exports, the Chinese government is undoubtedly particularly sensitive to a weaker yuan and claims that it is manipulating its currency.
MTD cannot take any points on this one.
Prediction #3: The Shanghai Stock Exchange Composite Index will end 2017 at 3500 or above, at least 12 percent higher for the year.
Extreme price volatility in 2015 caused many investors to view China’s stock markets as simply too treacherous for long term investors. A further sharp price decline in the first month of 2016 exacerbated this sentiment, despite the fact that the market seemed to stabilize during the balance of the year.
By the beginning of 2017, MTD became convinced that China’s stock market had indeed stabilized and predicted stability and an increase in the Shanghai Composite Index in 2017. Continued growth of the Chinese economy, plus over $20 trillion of deposits in Chinese banks waiting on the sidelines were the principal reasons for our optimism.
The stock market got close, but didn’t quite make it. The Shanghai Composite Index was stable during most of 2017, increasing steadily from 3104 at the beginning of the year to 3448 on November 13. Unfortunately, the market sold off after reaching its high, and closed the year at 3307, up 6.5 percent.
Point predictions are always risky, but that does not prevent MTD from making them. Although our 3500, 12 percent prediction did not pan out, we were certainly correct on the general trend and direction of the market and believe we deserve at least half credit, or 10 points.
Prediction #4: China’s auto sales will reach 30 million units, aided by the inclusion of low speed vehicles in the calculation.
In 2016, just over 28 million trucks, buses and passenger cars were sold in China, a 13.9 percent increase from the year before. This did not include sales of over 700 thousand low speed electric vehicles which are popular in China’s Tier 2 and Tier 3 cities. Because they are not officially recognized by China’s auto regulators, low speed electric vehicles are not counted in the auto statistics published every year.
Although many observers wonder how China, which already is the world’s largest market for new vehicles, can keep growing at such impressive rates, MTD believes that China’s auto market still has a long way to go and predicted 5 percent unit growth in 2017. Moreover, since low speed electric vehicles fill a major transportation need in China’s interior, with sales now over one million units annually, and look more and more like conventional sedans, MTD believes they should be included in the auto totals. In fact, rumors in the early months of 2017 suggested that the Central Government would promulgate new rules and recognize them as such.
The official numbers for the full year of 2017 will not be available until later in January, but total sales of trucks, buses and passenger cars in China for the first nine months of the year were up 4.5 percent. However, growth through November slowed to 3.6 percent, so it appears that unit growth will far short of MTD’s prediction. With respect to the other part of our prediction, no resolution of the status of low speed electric vehicles was reached by year-end.
Again, point predictions are risky, and the market didn’t grow as much as MTD predicted. However, we believe that we should receive partial credit of 5 points for this prediction.
Prediction #5: Despite all of the rhetoric, there will not be a serious breakdown in the Sino-American relationship in 2017.
While this was admittedly MTD’s most controversial prediction last year, we had two good reasons for making it. First, China is all about business and Chinese leaders understand how to deal with businessmen. Secondly, the Chinese are not afraid to negotiate. What may seem by many to be outrageous demands or statements by Trump, therefore, are likely to be viewed by the Chinese as merely the opening of negotiations.
By all accounts, the U.S. relationship with China has more than survived the first year of Trump. There have been no trade wars, and relations between Trump and Chinese President Xi Jinping are friendly. Nonetheless, Trump has not been shy about pressing Xi for more help with North Korea. While it remains to be seen how much China will actually do to help diffuse tensions on the Korean Peninsula, the country has taken some actions, including expressing support for a United Nation’s Security Resolution toughening sanctions on the rogue regime.
20 points for this prediction.