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China Economic Rebalancing and Goldman’s worst case

Friday, August 31, 2012 14:51

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From NextBigFuture.com

1. Barron's – Goldman Sachs’ Jim O’Neill, the man who will forever be described as the guy who coined the term BRICs, outlines what a Chinese hard landing would look like if nominal economic growth averaged 7% for the remainder of the decade.

Many others would not consider economic growth of 7% per year a hard landing. It does indicate what Jim O'Neill considers to be his worst case for China from now to 2020.

Here’s is O'Neill's 7% pessimistic outlook: “China’s GDP would still be some $ 13.5 trillion in 2020, and even if the consumer remained stuck at 35% of GDP, it will have increased by another $ 2.1 trillion. To put this in perspective, the total size of India is yet to breach $ 2 trillion,” O’Neill writes.

O’Neill says he finds it “very difficult to see the Chinese consumer representing such a low share of GDP with such low overall nominal GDP growth.” While Chinese economic growth is slowing, weak exports and investment are the primary culprits. Private consumption is already close to 40% of GDP. ”Even in a really persistently weak Chinese nominal GDP scenario, the numbers increase quite a lot, creating plenty of income for some,” O’Neill says.

Anyway, O’Neill argues that in a worse-case scenario the Chinese government is “surely to step in.” That leads him to conclude the Chinese leadership isn’t excessively bothered about what markets necessarily imply.