The Chinese government's readiness to intervene in the country’s economy should be a comfort rather than a concern for investors, argued Jim O’Neill, chairman of Goldman Sachs Asset Management, while he was in Hong Kong last week.
Chinese policymakers do worry that something may go wrong economically, and are fully prepared – as they have shown – to take action when or in case it does, adds O’Neill, who was formerly Goldman Sachs’ chief economist before taking up his new role late last year.
He suggests it is in countries such as India, where authorities worry too little about potential issues such as inflation, that there is more of a risk of problems occurring.
“By and large, Chinese monetary policy has done a pretty good job in the past five years, and one of the reasons is that when the evidence shifts, they shift,” he says. “So right now the message appears to be ‘inflation looks to be rising so we’ll keep tightening’, but if we get a lot more evidence like we’ve had this week, things could change pretty quickly.”
The evidence he refers to is the sharp drop in commodity prices and lower than expected Chinese industrial output growth in April.
China is particularly important in terms of its effect on commodity prices, given that the country accounts for more than 40% of global commodity demand, said Citi Private Bank in a report released on May 13. Chinese equity markets have yet to adjust by the same degree, but they are likely to struggle in coming months, adds the bank.
O’Neill believes that “the Chinese economy is probably slowing down more than people realise”. The country’s GDP growth is likely to drop to around 8% from 10.3% last year, he adds, and in the second half of the year inflation will cease to be a problem, prompting the central bank to stop tightening.
However, O’Neill does see risks to the Chinese economy, but he is of the view that a property bubble is not one of them. The authorities have taken effective measures to stop property prices from rising, he notes.
“In what other place in the world – certainly no democracy, certainly not the UK or the US – would policymakers dare to deliberately stop property prices going up?” says O’Neill, pointing out that their populations would be very unhappy if they did. “Which is why you get all these [real estate] bubbles in Western economies,” he adds.
As for other potential risks, O’Neill says one near-term problem could be that he is wrong about growth and inflation easing in the second half, leading to China continuing to tighten policy even if the economy slows down. But he sees this as a very small risk.
Another potential problem is that Washington continues “trying to blame China for everything”. This is quite scary, says O’Neill, giving an example that if US unemployment doesn’t fall significantly, the temptation for the US to undertake protectionist policies could be irresistible. “But, again, that's only a small risk as well,” he says.
The third risk is a much longer-term one, says O’Neill. “As Chinese people get wealthier, the Chinese central party machine has to adapt more and more to keep in sync with what its people want,” he says, “and that might be a real challenge.”