Jim O’Neill on China vs. Greece and the New “Growth 8”

Jim O’Neill, chairman of Goldman Sachs Asset Management and former chief economist of the investment bank, was this year’s keynote speaker at the UC RUSAL President’s Forum at the Hong Kong University of Science & Technology. He coined the term BRICs some 10 years ago, so the audience was keen to hear what he had to say about the “Changing Dynamics of the World.”

The world, O’Neill said, has evolved into a different place economically than many have yet realized. Many in business, economics, and the investment professions, as well as the media, are still stuck with mindsets that are outdated. For example, according to O’Neill:

What happens to China in the next year — in particular if China can succeed in bringing inflation under control — is almost definitely more important to the world than anything that happens to Greece.

Indeed, what has happened to China in the past and current decades — and what will come in the next one — in terms of its relevance to the changing dynamics of the world is a phenomenon that is rare to observe. Similar phenomenon can only be found centuries ago, in the last millennium.

O’Neill presented some interesting statistics:

• In terms of the share of 2010 world GDP:
• Developed markets comprise 65%; growth markets 23%; and emerging markets (Bangladesh, Egypt, Iran, Nigeria, Pakistan, Philippines, Vietnam, and others that are not in the Next 11) 12%.
• Of the growth markets’ 23% share: China contributed 9%; Russia 3%; Brazil 3%; India, Korea, and Mexico 2% each; and Turkey and Indonesia 1% each.
• In terms of the change in the size of GDP from 2010 to 2019:
• China’s GDP is projected to grow almost $9,000 billion in terms of 2010 US dollars, compared to around $3,000 billion for the U.S., and $2,000 billion for the eurozone.
• India, Brazil, and Russia will grow around $1,000 to $1,500 billion each.
• The eight growth markets in total will grow around $16,000 billion (based on projections from GS Global ECS Research and Goldman Sachs Asset Management).
• By 2020, China will contribute around 17% of global GDP, compared to 19% for the U.S. and 15% for eurozone. Japan will contribute around 8%, while Germany, Brazil, India, Russia, and the U.K. will contribute around 3–4% each (based on projections from GS Global ECS Research and Goldman Sachs Asset Management).

O’Neill feels that it is disrespectful to continue to call the BRICs “emerging markets.” And this also applies to some of the other markets that have been labeled “emerging markets” in the past — notably Korea, Mexico, Turkey, and Indonesia. He now refers to these markets as “growth markets,” or the “Growth 8.”

The BRICs, and particularly the “big C,” China, are actually at the core of global economic growth engine. Perhaps it is actually more appropriate to pay more attention to the BRICs than to Europe, although current events in the eurozone will likely be critical in terms of world financial markets and financial stability.

O’Neill also recapped the key convergence criteria of the Maastricht Treaty:

• Inflation rates must be no more than 1.5 percentage points higher than the average of the three best-performing EU member states (i.e., those with the lowest inflation).
• The annual government deficit to GDP ratio must not exceed 3%. (If not, the ratio is at least required to reach a level close to 3%. Only temporary excesses would be granted for exceptional cases.)
• The gross government debt to GDP ratio must not exceed 60%. (Even if the target cannot be achieved, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.)

Finland is the only EU member that satisfies these criteria, according to O’Neill. Among the G-20 countries, only Australia, Finland, and Sweden satisfy these criteria. On the other hand, all of the Growth 8 would generally satisfy these criteria.

In terms of global economic outlook, O’Neill made some interesting observations:

• The consensus forecast on 2012 GDP growth may be right about the eurozone (1%), but is probably too low for the U.S. (2.1%), which is below Japan’s projected growth (2.4%). The U.S., in O’Neill’s view, has not entered a lost decade similar to what Japan experienced. Structurally the country is still in better shape than many perceive; it is just experiencing a cyclical challenge. The current U.S. house price to income ratio is at the lowest level in two decades and is significantly lower than in the 1990s. He believes that the U.S. is now over its major problems.
• Consensus forecast has the world economy growing by 4%, mainly due to contribution from the growth markets.
• O’Neill believes that a hard landing is not likely in China. The key is what happens to inflation. If the consensus 2012 forecast of 3.9% inflation for China turns out to be correct, then it is highly likely that China will avoid a hard landing.
• China cannot keep on exporting. China’s future depends on itself, not exports. Recent incidents are good reminders for policymakers. China’s 12^th Five-Year Plan has explicit goals for boosting consumption’s share of GDP to rebalance the economy, a topic of much debate in China and around the world.
• World consumption is now driven by the growth markets, no longer by the advanced economies. We are in the era of growth market and BRIC consumers. China will be Germany’s number one export market, and other countries will benefit similarly.

Given the above, it is no wonder that O’Neill made the observation that the next head of the IMF may likely come from a BRIC country.

Slides for O’Neill’s presentation, which include many interesting statistics, can be found at: http://bit.ly/JOCdotW.