Blog post

Three good reasons to be bullish on China in 2015

Back at the start of the decade, I made certain assumptions about how the so-called BRIC economies -- Brazil, Russia, India and China -- would perform

Publishing date
09 January 2015
Authors
Jim O‘Neill

China is poised to drastically enlarge its role in the world.

Halfway through a decade in which China set out to rebalance its economy, it is poised to drastically enlarge its role in the world. Let me explain why.

Back at the start of the decade, I made certain assumptions about how the so-called BRIC economies -- Brazil, Russia, India and China -- would perform in the 10 years ahead. Five years on, China is the only one of the four to have either met or possibly slightly surpassed my expectations. Assuming that China's soon- to-be-published fourth-quarter gross domestic product number will come in at or close to 7.3 percent, as many experts assume, then from 2011 to 2014, China will have averaged real GDP growth of just less than 8 percent. I had assumed it would be 7.5 percent for the full decade (as did Chinese leaders back in 2011), and China could achieve this if its economy continues to grow by 7 percent for the next five years.

If so, it will have become a $10 trillion economy in current nominal U.S. dollars, well more than half the size of the U.S. (probably even bigger, adjusting for purchasing power), twice the size of Japan, bigger than Germany, France and Italy put together and not far off one and half times the size of the other three BRIC economies put together.

Brazil and Russia, for their part, have significantly disappointed my expectations. Indeed, their economic performance supports skeptics of their long-term potential, who attributed earlier growth primarily to high commodity prices. India also disappointed, but its growth rate accelerated in 2014. With the election of Narendra Modi as prime minister and the large drop in oil prices, India still has an outside chance of meeting my expectations for the full decade. It could even grow more than China in the second half.

Many international commentators remain bearish about China, expecting real GDP growth to slip significantly below 7 percent.

The reasons cited usually involve some combination of excessive debt, inefficient lending, weaker export markets and consumers' ongoing inability to play a bigger role in the economy. All of these things are relevant, but they are challenges that Chinese policy makers are familiar with and seem eager to overcome.

For the past few months, the Shanghai index has been the top-performing market.

What has become especially intriguing, in contrast to this pessimism, is how strongly Chinese equity markets have performed since early November. For the past few months, the Shanghai index has been the top-performing market. What happened to all those claims that Chinese equities never rise? The eternal bears now say the Chinese market is an unsustainable bubble and/or that local buyers have been essentially press-ganged into buying equities in order to make the economy look good. Perhaps illiquidity is playing some role, but it seems unlikely to be much of the story.

I can think of at least three basic reasons to be bullish on China: First, the collapse of crude oil prices will boost consumers' real incomes, helping them play a larger role in the economy.

Even though property prices have recently stalled, China will probably avoid a serious credit crunch

Second, even though property prices have recently stalled and begun to fall, China will probably avoid a serious credit crunch, partly because Chinese policy makers have been more serious about restraining prices before they can collapse.
Moreover, the price decline has made real estate affordable for more Chinese.

A third reason to be optimistic is the subdued nature of inflation in China. This allows for more accommodative monetary policy going forward.

Taken together, these factors will make it easier for China to rebalance its economy -- by raising wages, increasing property-ownership rights for urban migrants and reforming pension systems.

In 2016, when China -- with its economy growing at 6 to 7 percent -- chairs the Group of 20 nations, it can do so as a fully engaged member of the global economy.

This article originally appeared in Bloomberg View.

Read more:

China seeking to cash in on Europe’s crises

Financial openness of China and India: Implications for capital account liberalisation

About the authors

  • Jim O‘Neill

    Jim was a Visiting Research Fellow to Bruegel. He conducted research on aspects of changing global trade, global governance, and measuring better and targeting higher sustainable economic growth.

    Jim worked for Goldman Sachs (GS) from 1995 until April 2013. He joined Goldman in 1995 as a partner, Chief Currency Economist and co-head of Global Economics Research. From 2001 through 2010, he was Chief Economist and head of Economics, Commodities and Strategy Research (ECS). In September 2010, he became Chairman of Goldman Sachs Asset Management (GSAM).

    Prior to joining GS, Jim was head of research, globally, for Swiss Bank Corporation (SBC) from 1991 to 1995. He joined SBC in 1988. Prior to that, he worked for Bank of America and International Treasury Management, a division of Marine Midland Bank.

    Jim is the creator of the acronym BRICs. He has published much research about BRICs (which has become synonymous with the emergence of Brazil, Russia, India and China) and the broader emerging markets, as the growth opportunities of the future. This autumn, Jim is making a series for BBC Radio 4 about Mexico, Indonesia, Nigeria and Turkey, due to be aired in January 2014.

    Jim is on the board of a number of research organisations including, Itinera, the UK-India Round Table and the UKIBC. He is also Chairman of the Greater Manchester Local Enterprise Partnership Advisory Board.

    He is one of the founding trustees of the UK educational charity, SHINE. Jim also serves on the board of ‘Teach for All’ and a number of other charities specialising in education and in September 2013 he became a Non-Executive Director of the UK Government’s Department of Education.

    Previously, Jim served as a Non-Executive Director of Manchester United before it returned to private ownership in 2005.

    In 1978, Jim earned a degree in economics from Sheffield University and in 1982 a PhD from the University of Surrey. He received an Honorary Doctorate from the Institute of Education, University of London, in 2009 for his educational philanthropy.

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