Morgan Stanley's Zhu Haibin: It is expected that the fiscal deficit rate will remain at 3.8% next year. The central bank is expected to cut interest rates by 10 basis points and reserve requirements by 75 basis points. | Alpha Summit

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The GDP growth rate of China in the first three quarters of 2023 was 5.2%, and the annual growth target of 5% has been basically achieved. Most countries are still facing the scars left by the pandemic, and China's average annual growth rate of 4.6% over the past four years is lower than the potential growth rate before the pandemic.

During the recovery process after the pandemic, the transition and performance differences between new and old driving forces have become very apparent. The new driving forces have performed better, with solar cells and new energy vehicles being the two most outstanding sub-sectors in industrial production, while the decline of the old driving forces, especially the real estate sector, is more pronounced.

After the Political Bureau meeting at the end of July, two positive changes have emerged: short-term improvement in macro data and stronger signs of stable economic policies for growth.

The annual growth target for next year is likely to remain unchanged, expected to be around 5% like this year. It is challenging but still achievable. This requires the continuation of a more proactive growth-stabilizing trend in macro policies since August this year. Fiscal policies need to be moderately strengthened to improve quality and efficiency, while monetary policies need to be flexible, appropriate, precise, and effective.

It is expected that the fiscal deficit ratio next year will remain at 3.8%. Fiscal policies will have a more positive impact on the economy. The central bank may further reduce interest rates by 10 basis points and is expected to conduct three reserve requirement ratio cuts of 25 basis points each time. The credit growth rate is expected to remain at around 9.5%, close to this year's level. It is estimated that the central bank may provide support of trillions of yuan next year, targeting affordable housing and urban village renovation, and providing significant support through structural monetary policy tools such as PSL.

White-collar consumption next year is a major variable for economic recovery, and the probability of issuing consumption vouchers is relatively low. Exports still face significant pressure, and their contribution to the economy may still be negative.

The adjustment of supply and demand in the real estate market, especially the commodity housing market, may continue for some time. It is recommended that the government further increase efforts in the affordable housing sector, such as purchasing some unfinished projects or undeveloped land from the commodity housing market through "group procurement" and converting them into affordable housing.

It is recommended to restore a stable regulatory environment for the middle and high-end service industry as soon as possible, and promote the simultaneous upgrading of the manufacturing industry and the service industry. It is also recommended to restore the confidence of private enterprises as soon as possible. By establishing a more stable, predictable, and transparent policy environment, the confidence of the private sector and foreign investment in China can be further restored.

On December 17th, Zhu Haibin, Chief Economist of J.P. Morgan China and Head of Economic Research for Greater China, participated in the "Alpha Investment Summit" hosted by Wall Street News online, analyzing and forecasting China's macroeconomic situation in 2024.

》》Click here to watch the live broadcast《《

Here are the highlights compiled by Wall Street News:

Good morning, everyone. First of all, congratulations on the convening of the Alpha Summit. I apologize for not being able to be there in person today due to a scheduling conflict, but I am very pleased to have this opportunity to share with you a review of the economy in 2023 and an economic outlook for 2024 at the end of the year through the platform of the Alpha Summit. In the coming period, we will focus on two main issues:

The first is how we view the performance of China in 2023, a year of reopening after the pandemic, as most of the year has already passed. The second, and more important, is our outlook on the Chinese economy in 2024 based on this year's developments. The recent Political Bureau meeting provides us with some insights and recommendations on policy. Today, I would like to take this opportunity to share them with you.

Review of China's Economy in 2023

1. The annual growth target for 2023 has been basically achieved, but the scars of the pandemic remain

Let's first take a look at the performance of the Chinese economy in 2023, which is the first year that China has truly emerged from the pandemic. As of now, the growth rate of the Chinese economy in the first three quarters is 5.2%. This is consistent with our previous forecast of 5.2% for the full year of 2022-2023. In other words, the annual growth target of 5% set at the beginning of the year during the Two Sessions has been basically achieved.

However, if we look at the global context, during the four-year period from 2020 to 2023, although the global economy has also been severely impacted by the pandemic and has experienced a recovery afterwards, most countries are still facing the scars left by the pandemic. From the chart, we can see that the zero axis represents the average economic growth rate of each country before the pandemic.

If we take that as a benchmark, we can see that although most countries have recovered to some extent in the past two to three years, their economic growth rates are still below the levels before the pandemic. In other words, most countries have not yet fully recovered from the economic losses during the pandemic. The only exception is the United States, which has returned to the pre-pandemic growth rate due to massive economic stimulus measures.

The average growth rate of the United States between 2020 and 2023 is about 1.9%, surpassing the average pre-pandemic growth rate. As for China, if we calculate it as 5.2% this year, the average annual growth rate over the past four years is 4.6%, which is lower than the potential growth rate of around 6% or 5%-6% before the pandemic.

The same scars are also evident in most other countries, such as the Eurozone, and even more so in India, which is currently favored by many. So this is the first characteristic I want to talk about: although countries have experienced post-pandemic recovery in the past four years, the economic losses caused by the pandemic still persist.

The second point is inflation, which has been a major concern in the past year or two. In this regard, China faces different problems and challenges in inflation after the economic restart in 2023 compared to other countries.

The third indicator is policy. After the economic restart, central banks in most countries around the world, led by the Federal Reserve, have started raising interest rates since the first quarter of 2023. So far, the Federal Reserve has raised interest rates 11 times, totaling 525 basis points.

The People's Bank of China is one of the few major central banks that has continued to cut interest rates in the past few years. Since 2020, using the 7-day reverse repo rate as the policy rate, it has cumulatively cut interest rates by 70 basis points. So we can see that from several major economic indicators or economic dimensions, such as growth, inflation, and monetary policy, China's trajectory of recovery after the pandemic is different from that of the rest of the world.

This raises a question: why is there such a noticeable difference in the performance of the Chinese economy compared to other countries, especially the United States, after the economic restart following the pandemic? Next, I would like to discuss several main reasons, such as the different timing of the implementation and withdrawal of specific measures in epidemic prevention policies. Additionally, there are reasons beyond the economic and policy aspects, such as the impact of the tense geopolitical situation after the Russia-Ukraine conflict on the global supply chain shift.

2. After the pandemic, China and the United States have significantly different policy responses

The main difference lies in the economic policy responses after the pandemic. There are significant differences in the specific characteristics of the post-pandemic recovery between China and the United States, especially in terms of economic policy.

First, in terms of the stimulus intensity of economic policies, China and the United States have significantly different policy responses.

After the outbreak of the pandemic in 2020, the United States quickly implemented a massive fiscal and monetary policy stimulus. In terms of monetary policy, interest rates were quickly lowered to zero. In terms of fiscal stimulus, the fiscal deficit rate exceeded double digits for two consecutive years. In comparison, China's policy response after 2020 appeared relatively moderate and precise.

In the previous round of economic policy responses, after the global financial crisis in 2008, there were also significant differences in the economic policy responses between China and the United States, but the situation was reversed this time. If you remember, after the global financial crisis in 2008, China quickly introduced a 4 trillion yuan macroeconomic stimulus policy, resulting in a remarkable performance of the Chinese economy from 2009 to 2011, with an average growth rate of nearly 10%.

However, the excessive stimulus of this 4 trillion yuan policy brought about some structural problems, such as issues in the real estate market, private capital banks, debt problems, and investment efficiency. These were the main reasons for a series of supply-side and demand-side reforms in the past decade.

In terms of economic growth rate, China entered a downward channel after 2012, with GDP growth rate dropping below 8% in 2012 and currently approaching 5%. It can be said that this is partly due to a series of corrective policies resulting from the excessive policy stimulus in 2008.

The experience and lessons learned by the United States in 2008 were exactly the opposite of China's. After the crisis in 2008, a significant portion of the time in the United States was spent debating moral hazards and whether to rescue Wall Street financial institutions. Therefore, the policy response in the United States at that time was summarized as "too little too late," meaning that the stimulus intensity was too small and the timing was too late. So, after the outbreak of the pandemic in 2020, China and the United States adopted completely different policy stimulus intensities based on their respective previous experiences, which is a very important reason.

As we mentioned earlier, in terms of economic growth rate, the United States is the only country that has returned to the growth rate before the pandemic. This is actually closely related to the large-scale stimulus policies implemented by the United States. China's economy was the first to return to the pre-pandemic level in 2020, but due to insufficient policy stimulus or subsequent policy adjustments in certain industries, we have returned to a growth rate below the pre-pandemic level. So this is the first reason, which is the difference in the intensity of policy stimulus.

The second point that must be emphasized is the clear difference between China and the United States in the direction of macroeconomic stimulus policies.

In addition to the policy support for the return of manufacturing industry through investment, the United States mainly focuses on expanding domestic demand and providing relief and fiscal transfers to households. During 2021, the excess savings of the US household sector reached as high as $2.4-2.5 trillion. After the opening of the pandemic, this had a significant impact on the recovery of US consumption, resulting in a stark supply-demand imbalance between China and the United States.

On the left, we can see the industrial added value of China and the United States, which represents the recovery of industrial production. The dashed line represents the trend between China and the United States before the pandemic, and the solid line represents the performance after the pandemic. As you can see, during the pandemic, both the supply and demand sides of production were severely impacted, but China's supply side recovered first by the end of 2020, while the recovery of the US industrial production supply side was slower and only returned to the pre-pandemic trend in 2020.

Looking at the right side, if we consider retail consumption as the demand side recovery, we can see that the dashed line also represents the trend of each country before the pandemic. What is interesting here is that after the pandemic recovery, the retail consumption recovery in the United States, represented by the orange line, is very strong, while the blue line represents the trend in China before the pandemic. The consumption recovery in the United States after the pandemic is actually very strong, while China has fallen back to the trend before the US pandemic, resulting in a significant gap between China's own trend value.

Therefore, after the pandemic, due in part to the different directions of policy stimulus, the supply-demand imbalance in the United States is mainly reflected in the insufficient recovery of the supply side, leading to inflationary pressures. China, on the other hand, has a faster and more stable supply side recovery, but the demand side has always been lagging and weak, resulting in excess supply.

The third aspect, if we compare, China and the United States also have a significant difference in industrial policies.

To some extent, the United States has copied China's industrial policies, such as the three major bills - the chip bill, the inflation bill, and the infrastructure plan. The government hopes to promote the return and upgrading of US manufacturing industry in specific industries such as new energy or chips. In recent years, especially in the past year or two, this has had a positive impact on the recovery of the US economy.

China has similarities but also differences. In similar aspects, China has taken very similar, or even more proactive measures in promoting economic structural transformation, the conversion of old and new driving forces, and the cultivation of new driving forces.

In this year's recovery process after the pandemic, although the economic recovery this year, as mentioned in the July Political Bureau meeting, has shown a wave-like progress and a tortuous development in various aspects, the transition and differentiation between old and new driving forces are very evident.

But if we talk about impressive performance, in terms of new driving forces, such as new energy vehicles, as shown in the left graph, solar cells and new energy vehicles are the two most impressive sub-sectors in industrial production, and their performance has been very clear in the past year or two. However, the problem is that during the transition from old to new driving forces, the decline of the old driving forces is too significant.**

**The most prominent example is the real estate sector, which experienced the largest depth adjustment since the housing reform in 1998 in 2022-2023. Last year, real estate investment decreased by 10% compared to the fixed market investment, and this year it has continued to decline by nearly 10% from a low level. This is reflected in private investment and public sector investment, where real estate investment, especially in the private developer sector, has experienced a significant contraction. We can see that private investment as a whole is still in negative growth so far this year.

Public investment and industries supported by government policies, such as manufacturing and infrastructure investment, have shown relatively stable performance. Therefore, in China's industrial policy, only the new driving force sectors have shown strong performance. However, our major problem lies in the transition process, where the old driving force sectors, including the real estate industry and other sectors affected by industrial policies or strengthened regulations, will be greatly impacted. This is the third difference in terms of policies.

Outlook for China's Economy in 2024

After summarizing the similarities and differences between China and other countries in terms of economic recovery since 2023 or post-pandemic, we need to consider the direction of China's economic growth in 2024 and the trend of economic policies after the Political Bureau meeting.

1. Two positive changes after the July Political Bureau meeting

First of all, based on the recent data from the past few months, the economic performance this year has been volatile. After a strong rebound in the first quarter following the rapid recovery from the pandemic, economic activities slowed down to some extent after the second quarter. However, since August, various economic indicators have started to stabilize at the bottom and show positive signs.

Especially since August, we have seen that overall economic data has been better than expected in most months, and economic activities have been recovering. Exports have benefited from global demand, especially in high-tech exports. Compared to other economies in the region, China's exports have started to stabilize at the bottom in recent months.

Another unexpected development is that China's retail consumption has been better than expected since August, showing signs of stabilization.

Therefore, on one hand, after August, especially after the Political Bureau meeting at the end of July, we have seen two positive changes. One positive change is the short-term improvement in macroeconomic data, and the other is the strengthening of China's macroeconomic policy for stable growth.

From the interest rate cut by the central bank in August, the reserve requirement ratio cut in September, to the fiscal side, especially the approval of an additional 1 trillion yuan in fiscal deficit at the end of October, with 500 billion yuan to be used this year and another 500 billion yuan to be allocated for 2024. It can be said that on the fiscal and monetary sides, we have seen more proactive and targeted policies to stabilize growth.

In the real estate sector, since August, adjustments have been made on the demand side, including housing loan policies, interest rates, and down payment ratios. At the local level, restrictions on home purchases have also been relaxed. On the supply side, the financing difficulties faced by developers have attracted the attention of relevant departments in Beijing, and measures have been taken to address these issues. So, as we can see, macroeconomic policies have focused more on growth since August. And one point I need to emphasize is that the improvement in macroeconomic data after August is not directly related to the measures to stabilize growth implemented after August.

The data improvement after August is mainly in exports and retail consumption, while the policy support after August is mainly focused on infrastructure and stabilizing the property market. Therefore, we believe that the short-term momentum of economic stabilization may continue, which involves judging the policies for 2024.

1. The annual growth target for next year may remain unchanged, requiring active fiscal policy and prudent monetary policy.

Of course, the current Politburo or the Central Economic Work Conference has mentioned that the economy should remain stable and improve. The specific annual growth target will be announced at the two sessions in March next year. But according to our current understanding, there is a high probability that the annual growth target for next year will remain unchanged, at around 5% like this year.

This will require corresponding macroeconomic policies, which means that macroeconomic policies need to continue the more active trend of stabilizing growth since August. Therefore, our interpretation of fiscal and monetary policies for next year, as summarized in our recent report, is that fiscal policy should be actively strengthened and improved in quality, while monetary policy should be flexible, appropriate, precise, and effective.

1. The fiscal deficit rate for next year may remain at 3.8%, and fiscal policy will have a more positive impact on the economy.

In terms of forecasts, we believe that after the additional 1 trillion yuan deficit this year, which means that the upper limit of the implicit deficit rate of 3% has been broken, there is a high probability that the fiscal deficit rate for next year will exceed 3% and may remain at 3.8%.

In terms of the broad fiscal deficit, if we include the 500 billion yuan deficit from this year, which will be delayed until 2024, as well as the off-balance sheet deficits of local government special bonds, land transfers, and local government financing platforms, we believe that there will be a significant change in fiscal policy between 2024 and 2023.

In 2023, although we talk about active fiscal policy, if we look at the broad fiscal deficit, especially the off-balance sheet deficit rate, this year is actually a relatively obvious contractionary fiscal policy. According to the broad fiscal deficit, it has dropped by about one percentage point of GDP compared to last year.

The situation is expected to change significantly in 2024. The broad fiscal policy will be roughly the same as this year or slightly higher. Our baseline assumption is an increase of 0.1 percentage point. Therefore, fiscal policy will have a more positive impact on economic growth.

1. The central bank may cut interest rates by 10 basis points and reserve requirements by a total of 75 basis points next year.

In terms of monetary policy, we believe that next year, interest rate and credit policies will be similar to this year. That is to say, the central bank will restart interest rate cuts next year, especially before and after the change in the Federal Reserve's interest rate policy. We predict that the central bank will continue to cut interest rates by another 10 basis points next year. In terms of credit policy, we expect the central bank to cut the reserve requirement ratio (RRR) three times in the next 12 months, each time by 25 basis points. The credit growth rate next year is expected to remain at around 9.5%, which is similar to this year's level.

However, it is worth noting that there may be efforts in structural monetary policy next year. Specifically, how the central bank stabilizes the real estate market and addresses financial risks, such as the issue of hidden local government debt. The central bank is expected to have a greater impact, for example, we believe that the central bank may have a trillion-scale support next year, providing significant support for affordable housing and urban village renovation through tools such as PSL and other structural monetary policy instruments.

This will be very helpful in achieving the growth target of nearly 5% in 2024. Without the central bank's response, the real estate market is likely to continue its downturn next year, and real estate investment may still decline by 8%-10%. However, with support of around one trillion yuan for affordable housing and urban village renovation, which is equivalent to 8% of this year's total real estate investment, the overall slowdown in real estate investment next year may narrow to 2%-4%, which is a very important factor in our understanding of next year.

On the other hand, next year, there may be more proactive measures from the fiscal, local government, and central bank in addressing the issue of hidden local government debt, with more practical progress in debt replacement and debt restructuring. So this is a rough judgment on the policies for 2024.

5. It is expected that next year's economic growth rate will be close to the target, with actual consumption contributing two-thirds of the growth, while exports still face significant pressure.

As mentioned earlier, next year's economic growth target may be set at around 5%. Although this is challenging, it is still possible to achieve with the coordination and adjustment of fiscal, monetary, and other relevant policies we mentioned earlier.

Under various macro policies and other factors, we believe that next year's economic growth rate will be close to the target of 5%.

In terms of specific breakdown, for the three drivers of consumption, investment, and exports, if we compare with this year, if this year's annual growth rate reaches 5.2%, according to our current forecast, consumption will contribute about 80% of economic growth, 4.2 percentage points, which means that actual consumption growth this year is about 8%. We expect the growth rate of actual consumption to slow down to 6% next year, contributing 3.3 percentage points to the economy, which is two-thirds of the growth contribution.

As for investment, this year's actual growth rate of fixed asset investment is about 3%, contributing 1.6 percentage points to economic growth. We believe that next year, fixed asset investment is expected to reach 4%, contributing about 1.9 percentage points to economic growth.

An important factor here is that the renovation of affordable housing and urban villages can largely offset the further slowdown in traditional commodity housing market investment.

Thirdly, in terms of the external environment and exports, **next year will be similar to this year, with global demand slowing down and China's export growth still facing significant pressure. **However, in terms of its contribution to economic growth, next year will have a small negative contribution. This year is -0.5, and next year is expected to be around -0.3. This is a significant judgment on our part. Of course, in terms of policy response, I think the risks next year may still be significant and two-sided.

Firstly, from the perspective of consumption, as I mentioned earlier, the expected growth of actual consumption this year is 8%, which contributes nearly 80% to the economy. We should be aware that this is largely due to the low base effect from last year, especially since retail consumption was actually negative growth last year. Therefore, the rebound after the low base effect is a dividend brought about by the reopening. It will be very difficult to maintain the growth rate next year.

Our current judgment is that the actual growth rate may be around 6%. If we break it down, about five percentage points of growth will come from household income, which will be synchronized with GDP growth. Another percentage point will come from further reduction in the household savings rate. The savings rate of the Chinese household sector rose to 34% at one point last year, significantly higher than the pre-pandemic savings rate of 30%. The average savings rate in the first three quarters of this year slowed down to 31%. If it continues to decline to 30% or slightly below 30% next year, it may contribute an additional percentage point to the recovery of consumption. In other words, the actual consumption recovery of six percentage points faces a significant risk.

In terms of current income growth, one prominent phenomenon this year is the uneven recovery of the labor market and income among different sectors and households. One notable situation this year is the decline in income for middle to high-income individuals, particularly white-collar workers, who face the risk of salary cuts and layoffs. Therefore, their income decline and the phenomenon of downgraded consumption are more apparent. On the contrary, consumption from migrant workers, low to middle-income individuals, or third- and fourth-tier cities and the service industry has been relatively stable.

6. White-collar consumption is a major variable for economic recovery, and the probability of issuing consumer vouchers is small

Next year, a major issue is consumption, especially for middle-income families, which includes white-collar workers. Whether their consumption can stabilize and recover quickly will be a major variable for the sustainable recovery of the economy next year. Therefore, we have been calling for economic policies next year to focus on expanding domestic demand and forming a virtuous cycle of consumption and demand promotion, as stated by the Political Bureau.

There are various options for macroeconomic policies, such as issuing consumer vouchers, cash payments, or digital currency, which have been suggested before. To be frank, the probability of these options is relatively low. However, there are other policy options to consider, such as the policy support announced by the National Development and Reform Commission at the end of July, which targets industries that have a significant impact on upstream and downstream sectors, such as automotive, home furnishings, and cultural tourism consumption.

In addition, whether the government can improve the social security system and increase support in the long term has a significant positive impact on reducing precautionary savings in the household sector. Therefore, we hope to see this transformation by 2024.

7. The adjustment of supply and demand in the real estate sector will not end in the short term, and investment in affordable housing needs to be increased In terms of investment, the issue of implicit debt brought about by real estate and local governments still exists and will continue to be a key concern in the future.

In the real estate market, there has been a significant adjustment in the past two years, with even some key indicators, such as new home sales and new home construction, showing signs of overcorrection. However, in terms of the fundamental supply and demand of the current market, from the supply side, the area under construction for new homes still exceeds 500 million square meters, which is basically equivalent to more than five years of annual sales based on the current sales volume. Therefore, the adjustment of the real estate market, especially the commodity housing market, may continue for some time and will not end in the short term.

In this regard, we call for a policy where the government may need to further increase its efforts in the affordable housing sector, especially through the affordable housing market. For example, the government can purchase some unfinished projects or undeveloped land from the commodity housing market through centralized procurement and convert them into affordable housing.

On the one hand, this can hedge the downside risks of the entire real estate market through investment in affordable housing. On the other hand, it can accelerate the destocking cycle in the commodity housing market. This is a policy we hope to see in 2024.

1. Next year, there will be greater external demand pressure, and exports may still have a negative contribution to the economy.

Lastly, in terms of trade, the export growth rate mentioned multiple times this year, the export growth rate in US dollar terms, has turned negative. However, what I want to point out is that the overall exports this year are actually better than originally expected.

From the chart on the left, we can see why the export growth rate in US dollar terms has turned negative this year. It is largely due to the effect of prices, meaning the depreciation of the Chinese yuan against the US dollar, coupled with exporters adopting more aggressive price reduction measures to maintain market share.

Therefore, we can see that in the past few months, the average year-on-year decline in the US dollar-priced export prices of Chinese goods has been in double digits. In fact, in terms of export volume, the export volume was negative in the second quarter but has returned to positive growth since the third quarter.

Moreover, we can see that this year, in terms of the direction, destination, and products of exports, we have made positive progress in promoting diversification. For example, the share of exports to traditional G3 countries, the United States, Europe, and Japan, has been declining significantly since 2017. However, our share of exports to developing countries such as Africa, Latin America, Russia, and Asia has been increasing.

In terms of products, the share of exports in the field of new energy and new energy vehicles, which was less than 0.5% of the total exports from 2014 to 2017, has now exceeded 6%. This is a very positive change. So overall, exports this year have been stronger than expected.

However, next year, with the global economy facing monetary policy and liquidity tightening, most countries, especially developed ones, may face economic slowdown, and China will still face significant external demand pressure. Therefore, we expect that exports will still have a negative contribution to the economy next year. 9. Restore a stable regulatory environment for high-end service industry and regain confidence of private enterprises as soon as possible

Finally, I would like to propose a few policy suggestions. As we mentioned earlier, in order to achieve a growth target of around 5%, in addition to implementing some corresponding easing measures in fiscal and monetary policies, it is more important for us to make some obvious adjustments in certain policy directions. For example, as we mentioned earlier, for the consumer side and domestic demand, more proactive and effective measures can be introduced.

In terms of industry policies, in addition to supporting policies for new energy vehicles and manufacturing upgrades, can we adopt a more balanced approach between manufacturing upgrades and service industry upgrades? Especially, the mid-to-high-end service industry has been greatly impacted by industry rectification and regulatory policies in recent years. Therefore, we hope that the mid-to-high-end service industry can quickly restore a relatively stable regulatory environment and promote the simultaneous development of manufacturing upgrades and service industry upgrades.

Lastly, as the central government has been emphasizing in recent months, it is important to restore the confidence of private enterprises as soon as possible. By establishing a more stable, predictable, and transparent policy environment, we can restore the confidence of the private sector and foreign investment in China. This is crucial for future sustainable development and the improvement of China's labor productivity.

Alright, that concludes my sharing. Once again, I would like to thank Alpha Forum for the invitation, and I hope that all the guests and listeners will have a smooth and successful year ahead. Thank you all!