Goldman’s Jim O’Neill is the man who invented BRICs, and he’s been a fervent China bull.
And yet in his latest monthly note, he’s concerned.
Basically, he’s not seeing China shift its growth strategy the way he’d like. Inflation is still torrid, and the central bank is being forced to resort to blunt instruments.
No doubt influenced by the price of their A share market, I found myself worrying somewhat about China this week. Before any of you get over excited, this is against the background of me thinking that a “happy slowdown” was in the process of being achieved in China. I entered this year strongly of the opinion that Chinese policymakers would be planning for a period of softer overall GDP growth, in which “quality” was more important than “quantity”.
A month ago, it seemed to me that most published data was starting to show signs of a slowing economy and a possible peaking in the commodity-related inflation pressures. Certainly, key lead and coincident indicators suggested to me that this was likely. Both the GS China Financial Conditions Index (FCI) and the GS China Economic Lead Indicator have suggested slower growth ahead for some time. The last batch of monthly data, however, published nearly two weeks ago suggests that growth has not apparently slowed that much and CPI inflation rose to 5.4pct, with fears of more increases to follow. Linked to this, as I discussed last week, it appears as though policymakers are searching for additional ways to tighten monetary policy further, including allowing a faster pace of RMB appreciation.
All of this seemed perfectly sensible to me. However, this past week, the China A share market suddenly gave up half its rally year-to-date suggesting something is upsetting local confidence. I hope this is temporary. If I simply look at reliable indicators that have served me well in the past, I find myself slightly worrying that China runs some risk of slowing things too much. I am sure my concerns will turn out to be temporary. Certainly today’s April PMI release showing some softening in both activity and import prices are a renewed turn for the better.
The country’s move to “smarter” high-quality growth, rather than torrid GDP was at the core of its 5-year plan announced earlier this year.
And yet, people should be sceptical that the wise central planners in Beijing really know how to get the kind of growth they want.
That’s what O’Neill is getting at here.
For more on the essences of China’s new growth ideas, see BofA/David Cui’s note from February.