By Alex Frangos
Jim O’Neill, Goldman Sachs Asset Management’s chairman and former chief economist for the investment bank, was in Hong Kong Thursday and gave a briefing to reporters. The sharp-tongued and nomenclature-obsessed Mr. O’Neill is well-known for coming up with the acronym BRICs, a grouping of fast-growing and large emerging economies: Brazil, Russia, India and China. Now he’s trying to do away with the term “emerging markets.” Mr. O’Neill is a long-time proponent of the idea that the future of the global economy lies outside the developed world. Here are edited excerpts from his presentation and Q&A.
China is slowing…a happy landing and possible a big rally…
“The Chinese economy is probably slowing down more than people realize and therefore it’s not surprising given the importance of China that commodity prices are under pressure. To me it’s a surprise they rose so much earlier this year. China will slow down to around 8% GDP, and consensus is above 9%…
I call it a happy landing, and if I’m right, sometime during the second half of this year, Chinese inflation will not be a problem. It will come down below 4% and the PBOC [People's Bank of China] will stop tightening monetary policy and we can all live happily ever after…
If the PBOC stops tightening later this year, you could have a big rally in China.”
Three risks to China’s ‘happy landing.’
“I certainly don’t think some of these conventional fears Western people have, I don’t think they’re true…I certainly don’t think it’s a property bubble.
What could go wrong? In the near term, Chinese inflation isn’t going to slow in the second half of year and they’ll have to keep on tightening policy as the economy slows. That’s a small risk. Very small…
The second risk is Washington stays in this game — it’s like a national sporting pastime — of trying to blame China for everything. So you get out of bed and use the wrong toothpaste, it must be China’s fault. If U.S. unemployment doesn’t fall significantly, the temptation for Washington to undertake protectionist policies…but that’s only a small risk as well…
The third thing, that’s much longer term; as Chinese people get wealthier, the Chinese central party machine has to adapt more and more keep in synch with what Chinese people want, and that might be a real challenge.”
On Inflation: Why he’s worried about India, Indonesia and Brazil, but not China and South Korea.
“India, I’m slightly concerned about because it’s not so obvious to me that policy is as pre-emptive in India as it is in China. Brazil, I’m currently concerned about because you have a new government with very ambitious plans to do a number of things and might find it difficult to keep inflation in the central bank’s target.
Indonesia I’m not so sure about in the near term either. I like countries where the policy makers worry. Not enough of these countries’ policy makers worry. I’d like it if India worried more. Korea worries and [officials there]are doing a pretty good job with their inflation challenge.”
Europe’s problem isn’t debt.
“The one place I do worry about is Europe. And I do think we have a real problem with European monetary union….It’s not a conventional debt crisis. It’s a crisis about the structure and leadership of European monetary union. You look at average deficits and debts, it’s lower than the U.K., the U.S. and much lower than Japan…
Despite that being a big problem, I think investors worry far too much about it being a source of global recession. People forget Germany is nearly one-third of the euro area and Germany is booming. And it might be because Germany is booming that we have the crisis we have, because Germany has less sympathy for the crises other countries face.”
U.S. economy: “A pause that refreshes.”
“The recent softening growth I’d describe as the pause that refreshes rather than any significant, serious slowdown…Looking at indicators I’m trained to follow, there’s no sign of a major slowdown.”
On Mr. O’Neill’s effort to dispense the with the term “emerging markets” when referring to the eight largest, as he called them, “growth economies:” China, Russia, Brazil, India, Indonesia, Turkey, South Korea, and Mexico:
“It’s socially inappropriate and businesswise inopportune to call them emerging markets…My goal as chairman of Goldman Sachs Asset Management is to influence all the 5,000 people who work [here] and all our clients to stop calling those eight countries emerging markets…[According to Mr. O’Neill, those eight economies will account for $15 trillion in incremental economic growth this decade, compared to less than $4 trillion in the U.S.] How on earth can we call countries with that much economic impact emerging markets?
Within those eight, the BRICs are responsible for three-fourths of that, and most interestingly, this incredible thing called China is half of it and as with everything else in life, it’s my contention…what’s going on in China is easily the most important thing facing everybody this decade…That’s my overriding philosophy of modern life really.”
On countries that aspire to be added to the BRICs acronym
“It’s been nine and a half years since I dreamt of this strange phrase that literally has changed my life. Who would have dreamt that? To be as important as a BRIC you have to be at least 3% of [global] GDP with potential to be 5%. It’s very hard in the next few decades to see any other country with the possible exception of Mexico and Indonesia to be in that category. Indonesia and Mexico would have to do some spectacular things…
I had a visit from Indonesian policy makers last week. They were begging me to call it BRIICs… They said we’re going to be bigger than Russia. I said I don’t believe you. In order to be bigger than Russia, Indonesia would have to grow by 10% [a year] for the next decade…Mexican policy makers tried to persuade me it should be MBRICs….
I’m still surprised that they had South Africa join the BRICs countries conference [last April]. South Africa is tiny. It’s half the size of Indonesia and doesn’t have many people. The reason it happened is China sees it as a gateway to Africa and commodities.”