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An analysis from Jim O’Neill, who is former chairman of Goldman Sachs Asset Management and chairman of education charity Shine (www.shinetrust.org.uk) |
Many people are worrying that China's weaker growth is not only set to continue but maybe weaken even further. A number of observers are starting to think about a so-called "hard landing".
I happened to spend a couple of days in China the week before the Q2 numbers were published so my mind is fresh with things I observed and heard. I was a guest of the 48 Icebreakers Group, who were celebrating their 60th anniversary, and met a number of senior policymakers. I also met a number of leading business people and participated in a lively discussion about the economy hosted by CCCTV, the state television channel.
I came away thinking that, while China's slower growth is for real, most of it has occurred as a result of government policies as part of their shift to focusing on a better quality of growth and not just growth for the sake of it.
Before I turn to discussing the details behind the current state of the economy, let us not forget this: China's economy is $8.2 trillion, now more than half the size of the US. That means if China grows by 7.5pc - its Q2 rate and what the government is assuming for the rest of the decade - this would be equivalent of the US growing by 4pc.
The US has not grown by 4pc for many decades, apart from the odd year. So if China's slowdown is limited to 7.5pc, then from a global perspective, this is a country that is going to have a massive impact on the world. So, while a slowdown from above the 10pc China achieved for the best part of the last three decades is notable, from a global perspective, it is not as slow as many people think. If China grows by 7.5pt for the decade (it's currently closer to 8.5pc so far this decade), it will be an economy of around $16 trillion or more by 2020, allowing its average citizen to enjoy wealth of around $12-13,000.
What would be of concern is if China was still growing by 10pc or more, and its growth was based on exports and state-backed investment spending. Such growth would place huge pressure on natural resources as well as creating many problems internally in China, including a widening gap between the privileged elite and the less well-off.
The current leadership has taken up the mantle of the previous regime's five-year plan and decided that it wants more balanced growth, which is more inclusive for all its 1.3 billion people. Moreover, it seems intent on trying to execute this plan and actually make the transition to a more balanced economy, with a greater role for the consumer and less importance for exports and state or regional state-backed investment.
In my TV discussion, I debated the current state of the economy and these challenges with other guests, most of whom are prominent Chinese business people or economists. To my slight surprise, given that it was CCTV, they were all quite open (I didn't see it shown on TV so I am not aware of what was edited out!). A couple thought that the leadership was not really committed to change; others thought they were, but it is extremely difficult to engineer.
I teased them all, saying this is the sort of thing I hear from around the world about China all the time these days. I also pointed out that if you track the relationship between monthly reported retail sales - the only monthly guide for consumer spending, relative to industrial production - you can see that it is slowly trending in the right direction. This was partly in response to one person who claimed that, despite the attention being given to higher wages in China, the real value of household wealth continues to decline, making it difficult for most Chinese people to consume.
Given that real retail sales are trending higher, relative to industrial production, despite the state-enforced clampdown on luxury gifting and its efforts to stop house prices rising too quickly, there must be some real wealth being created, otherwise it wouldn't be happening.
I also cited a personal anecdote: walking around the shopping mall in the complex where I was staying I was struck how busy it was for a weekday evening. I have been staying there since it was first built and it never used to be so packed.
I left China wondering whether, in contrast to previous periods, this leadership is trying to change too many things at the same time. I discussed this quite openly with the policymakers I spoke to, and all of them suggested it is possible that growth could be slower than they would prefer, but they are determined to make these changes.
I ended up suggesting to some of them that, to help the adjustment, perhaps they might want to do something really bold and even get rid of the notion of the "migrant worker" completely, allowing them to have the same rights as everyone else. Far from demonstrating irritation at my possible lack of diplomacy, two said in essence this is what they will do in the next couple of years in all but the largest cities.
Returning to London, I still think there is a risk that growth might slow further as a result of government-inspired policy changes, but given the leadership's determination, I am more confident that the decade ambition of 7.5pc is likely to be achieved. For the rest of us, including here in the UK, that is going to remain a fantastic business opportunity, especially for those that can provide want they want to consume.