Why is it worth listening to Jim O’Neill, presently Chairman of Goldman Sachs Asset Management?

Mr. O’Neill’s pronouncements are news; they are reported by Bloomberg, for example. Is this just the usual guru-worship? I think not. Despite my general scepticism about both gurus and investment-bank analysts, I think that Mr. O’Neill has realised the value — the marketing value, that is — of being early. He is prepared to use market and other high-frequency data to make early calls on the state of the world, before more formal data releases confirm his beliefs. When he is wrong, he is forgiven (for such a “senior” person, he is viewed as a bit of a scamp). When he is right, people think he has been brilliant. And, of course, he has been brilliant — sticking your neck out and taking a view is part of what it takes to be brilliant.

So when Mr. O’Neill says that Chinese growth should be expected to slow, I start to wonder why he has said it, and have tried to think of some reasons:

  1. Commodity prices have been rolling over since the start of the year. China is a — the — big buyer of commodities.
  2. The trade surplus has bounced back from what was probably a seasonal drop, but it does look limp compared to recent history.
  3. The appreciation of the currency means that Chinese exporters are probably still getting lower CNY prices for their products. (Update: here is a quick-and-dirty graph of Chinese export inflation in CNY).
  4. At the same time, commodity and labour-cost inflation will be squeezing margins from the other side. This is not a good situation for an investment-driven economy.
  5. There are signs that China may be getting serious about using monetary policy to slow its bubble economy — also bad for investment, especially the credit-driven local-authority investment that has been driving GDP growth recently.
Perhaps these reasons are enough to predict a cooling of China’s growth — I will have to give that some thought. I still do not expect a recession — yet — on the basis that it takes an awful lot to kill a credit bubble (and loan growth is still rising).
Advertisements