2014 Predictions: How’d I Do?

In the beginning of the year I made a series of predictions about China in 2014. And since I am a big believer in transparency (Please excuse the pun; I am, after all, a glassmaker.) I thought it only fair to go back and see how I did. (To see the original post, click http://www.glassmakerinchina.com/predictions-for-2014/)

(The predictions are scored on a scale of 1 -10 with 1 being ‘totally wrong’ and 10 being ‘right on the money.’)

  1. Pollution – My prediction: Export taxes – both direct and indirect – on energy and pollution intensive industries that will ultimately contribute to global inflation.

My score: 7

The taxes never came to life but I got the severity of the issue and the government’s sincere reaction right. A new word was added to the Chinese lexicon here in Beijing this year – airpocalypse – but the problem is far from limited to the nation’s capital. And while it hosted this year’s APEC meeting in Beijing in October the government showed the strength of its resolve, shutting down nearly all production within a 125 mile radius of Beijing for two weeks and forgoing the tax revenue that represents.

At a recent meeting of national environmental officials, moreover, Vice-Premier Zhang Gaoli said, “China will insist on efforts to optimize economic structures to reduce pollution. There is zero tolerance for the development of polluting industries.”

  1. Japan – My prediction: There will be a standoff. The U.S. will intervene to allow Japan to save face. But there will be little question as to China’s emergence as the political and military powerhouse of Southeast Asia.

My score: 5

Thankfully, the standoff never occurred. Japan did, however, back way off on its rhetoric and the government of Prime Minister Abe did show more public tolerance for China’s rising influence in the region. Perhaps the U.S. played a role behind the scenes; perhaps not. But there was far less saber-rattling in the end, the 600-mile long air defense identification zone unilaterally announced by China in the East China Sea remains in place, and the Diaoyu/Senkaku Islands remain in dispute.

  1. Inflation- My prediction: China’s inflation will jump substantially in 2014. By 2015 the government will target inflation rates below 6%.

My score: 1

I missed big time, I admit. For two reasons. The first is that I failed to recognize the excess capacity that exists in China in key industrial sectors. And wage rates, on average, have not risen to the extent expected.

Inflation in Q3 of 2014 fell to 1.2% from 1.4% in Q2, both well below government targets, sparking fears that deflation is the real threat here.

  1. Financial & Legal Reform – My prediction: Today the legal and security apparatus in place in China exist largely to maintain social harmony and protect the interests of the state. Their agendas will gradually pivot, however, toward more protection of individual rights, particularly in the area of credit and property protection.

My score: 9

The theme of the 4th Plenary Session of the 18th Central Committee of the Communist Party of China held this autumn in Beijing was devoted to the rule of law and the Committee took substantial steps to limit the influence of local governments on the legal process.

And the People’s Bank of China, the central bank, took the first step to introduce a deposit insurance system, one of the boldest financial reforms undertaken to date. Under the draft rules, currently released for public comment, deposits up to 500,000 yuan ($81,500) will be insured in the case of the bank’s insolvency or bankruptcy.

  1. Land Reform – My prediction: Land reform will lead to a decline in commercial real estate values and numerous urban shopping malls will be converted to apartments and office buildings.

My score: 6

The luxury mall conversion isn’t yet a stampede but new construction has slowed in key markets.

More importantly, the government will role out national reforms in 2015 allowing farmers to transfer land-use rights and to use land ownership as collateral, a move comparable to the reform introduced in urban areas that sparked two decades of unparalleled economic growth. The government has also consolidated the real estate registration process and relaxed real estate market controls in the second half of 2014.

  1. Outbound Investment- My prediction: Foreign outbound investment will not expand as rapidly as many are predicting. And many of those Chinese companies that have made the leap will downsize their ambitions or withdraw altogether.

My score: 7

While the successful U.S. listing of Alibaba and the Dalian Wanda Group’s acquisition of U.S. theater chain AMC received a lot of attention, I believe I basically got this one right and for the reasons argued.

  1. The Wealth Gap- My prediction: Significant steps by the government to redistribute income and wealth. But more importantly, significant steps to redistribute opportunity by creating a more fertile environment for small private companies.

My score: 8

President Xi Jinping took his anti-corruption campaign to the large state-owned enterprises that control key sectors of the economy. He even went so far as to establish limits on compensation for the executives of SOE’s, capping their pay to a multiple of that of the lowest paid employees.

In March, Premier Li Keqiang announced that more than 200 items previously requiring the approval of the State Council will be canceled or delegated to lower-level governments, making it easier for entrepreneurs to form and finance new enterprises. During the first nine months of 2014, in fact, 2.65 million new enterprises were established, an increase of more than 52%.

  1. Corruption – My prediction: Expect continued high-level crackdowns on government corruption AND expect new regulations relating to corruption in the PRIVATE sector.

My score: 10

President Xi’s anti-corruption credentials are beyond challenge. In July, Zhou Yongkang, a former member of the powerful Politburo Standing Committee and chief of China’s internal security apparatus, was placed under official investigation for “serious disciplinary violations,” the first time an official at this level has ever been disciplined by the Party.

  1. Foreign Investment – My prediction: Many foreign companies will re-think their China strategies. Some will pull out. Others will face PR nightmares when the predictions noted above expose what’s really going on in their companies here.

My score: 9

On the heels of its embarrassment over the payment of bribes in Mexico, Walmart faces a new accounting scandal here in China as it investigates the potential that its local executive team cooked the books to hit earnings and growth targets.

In his annual China commentary, McKinsey China expert, Gordon Orr, notes, “China will be the focus of many, many boardroom discussions around the world next year. Unlike most previous years, the topic won’t be whether to double down on China – it will be whether to hold or even reduce exposure to a particular sector of the country overall.” In the end, however, Orr does expect most companies to stick with their current China strategies. I agree.

10.  Luxury – My prediction: No. Not indefinitely, for sure. The Chinese do NOT aspire to be foreigners. They don’t crave acceptance by the social elite of Paris, New York, or Prague. They’re perfectly happy, indeed proud, to be Chinese. And rightfully so. 

I predict, therefore, a backlash against foreign luxury brands that blatantly pander to Chinese wealth. The Chinese appreciate quality and are willing to pay for it. They don’t, however, care half as much about style or image as they care about respect.

My score: 7

Backlash was too strong of a word in the end. While luxury markets contracted in 2014 it is unclear how much of the contraction was due to a change in consumer priorities and how much was a result of the government’s anti-corruption campaign. Either way, 2015 is sure to be another tough year for the purveyors of luxury and many have already adjusted their pricing models to address the perception of excessive price gouging.

My Final Prediction: The world has taken notice of China. Now the world must learn to take it seriously. On its own terms. In the context of its own traditions and its own culture.

My score: 8-10

Overall I’m going to give myself a thumb’s up. There is no question that 2014 saw the further emergence of Chinese influence around the world. Whether it involved territorial disputes in the South China Sea, ongoing friction with Japan over it’s militaristic past, or ongoing disputes with the U.S. over cyber espionage, I can’t think of a single case when China literally backed down.

The phrase ‘with Chinese characteristics’ has become universal and commonly understood. The Chinese are doing exactly what they set out to do and they are, without exception, doing it their way. It’s a course of growing influence and diplomacy that I don’t expect to change any time soon.

There is little doubt that 2014 saw China's continued rise to power in the region and the world.  And they did it 'with Chinese characteristics'.  That part I got right.
There is little doubt that 2014 saw China’s continued rise to power in the region and the world. And they did it ‘with Chinese characteristics’. That part I got right.

Note: The author also writes novels under the pen name of Avam Hale. You can find them in the Amazon Kindle store and they can be read on any mobile device loaded with the free Kindle App, available for all operating systems.

Copyright © 2014 Glassmaker in China

Notice:  The views expressed in this post are strictly those of the writer acting in a personal capacity.  They are not in any way endorsed or sanctioned by his employer or any other individual with which he may be personally or professionally affiliated.