What was ‘The Most Important Thing This Week’?
That’s what Jim O’Neill of Goldman Sachs Asset Management asked investors over the past several days, as he explains in his latest letter.
The answer, obviously, was Italy.
OK, then, what was the second more important thing?
According to O’Neill, only one person he talked to know the answer: Chinese inflation.
China: The Latest Data and the BRICs.
This week, we saw the usual monthly release of most of the important data in China, which again showed signs of slowing momentum in the economy. The data also showed slowing inflation and signs of a continued narrowing in the trade balance. Also important was the monetary data. While M2 showed further softening, the data also contains hints of stabilisation and more high frequency signs that suggest monetary signals are shifting. While many debate whether China’s “soft landing” will allow monetary easing, at the margin, it looks as though they are already tinkering.
China’s trade surplus widened over the previous month, but by a much lesser degree than expected. Moreover, with 10 months reported, the annualized trade surplus is not much over 2 pct of GDP. Exports are weaker than expected and imports are stronger. In my view, this continues what appears to be a relatively clear trend. It continues to baffle me why so many Western commentators and policymakers seem to ignore pretty strong evidence that this “global imbalance”
has turned significantly for the better.
The latest inflation data confirms what most forecasters have believed. Some of the pickup in Chinese inflation earlier this year was highly likely to reverse as base effects from late 2010 diminished. Together with a turnaround in some domestic food prices and the consequences of a slowing economy, Chinese inflation is heading back below 5 pct, possibly even close to 4 pct by year end, and back below in early 2012. As I have written about repeatedly since the Summer madness in markets, this development is extremely important for both China and the rest of the world. If inflation continues to ease, then the likelihood of a soft landing rises, and China will be able to achieve a shift more towards domestic consumption-led growth. As I am fond of saying to people, in 2011, the change in China’s nominal GDP in US$ will be the equivalent of creating three new Greek economies. In the context of the above question and what is important this week, I realised that, along with the other three BRIC nations, the probable change in the US$ value of their combined GDP in 2012 is likely to be close to $2 trillion. They will effectively create the equivalent of another Italy.
This is what the BRIC countries can do to help the world, and especially troubled Europe, way more than any specific steps to invest in European beleaguered bonds.
On Friday morning, our money market team hosted a client breakfast about China and I was joined by the head of our Chinese asset management business, Wang Yi, to lead the discussion, which turned out to be very interesting and quite broad. We discussed all the usual issues and many more. And, as I said in concluding, Yi and his team have a very exciting future ahead of them and for us.
What’s great about O’Neill is that he never gets too worked up in the panic du jour, and obviously this week is no exception, with his focus on some much broader trends that are emerging.