The BRIC Road to Growth. Jim O'Neill

      Chapter 2

      The Chinese century

      The previous chapter highlighted the astonishing degree of change in the world economy. It is essential to understand that China is at the heart of this story. As noted in Chapter 1, in 2011 the GDP of the BRIC economies increased by $2.3 trillion, adding the equivalent of another Italy to the world economy. Of this increase, nearly $1.4 trillion was due to China’s growth. David Cameron seems to have understood the implication; at the Conservative Party Conference in October 2012, he pointed out that the previous year China had created the economic equivalent of another Greece every thirteen weeks. However, many people seemed unaware of the relative importance of China’s growth; everywhere I travelled (including China) during 2011 and 2012, the only subject people wanted to discuss was Greece. I developed a stock answer: that it is a lovely country but, in the context of the world economy, just not very important.

      The Chinese themselves do not always appreciate their relative importance in the global economy. They often still see themselves as merely an emerging economy with many impoverished people and little global relevance. As recently as July 2013, on a brief trip to Beijing, I gave a presentation to an audience of over 300 distinguished business people long involved in Sino–British trade, the ‘Icebreakers’ of the 48 Group Club, and even there, based on the reactions to my comments, they had little awareness of their huge impact on the world.

      To drive home the point, consider that, at the end of 2012, China’s nominal GDP had increased to $8.2 trillion, another $900 billion increase compared with the end of 2011. That followed a $1.4 trillion increase the previous year. Even within the BRIC context, these figures are remarkable. Understandably, people often compare China and India, not least because they are the only nations with more than a billion people. But China’s GDP is now more than three times the size of India’s, and China’s growth is currently creating another India (or indeed another Russia) every two years. China is now the same size as the other three BRIC economies put together, and even though China’s growth rate is slowing, it is still contributing a lot more to world GDP growth than the other BRIC countries.

      Two further statistics demonstrate China’s remarkable scale, and the scale of the mental adjustment we need to make to grasp this essential feature of the global economic landscape. First, the 7.5% real GDP growth I am predicting for China this decade, although slower than its growth rate in the previous three decades, is the equivalent of 4% annual real growth in the American economy. To find a similar performance in the United States you have to go back many years to when it was a far smaller economy. Second, this 7.5% growth means that China will contribute as much to world nominal GDP as the United States and the eurozone put together. This is utterly transforming world trade and the balance of economic power on a scale not widely appreciated.

      A new China?

      If China’s economic growth does attain that figure of 7.5% on average during the decade 2011–20, then (depending on the value of its currency against the US dollar) the size of the Chinese economy will be nearly the same as that of the US economy. Goldman Sachs has been predicting that China will overtake the United States in nominal terms by 2027. Not only do many of us struggle to comprehend the speed and scale of China’s ascent so far, but the fact that China’s growth is decelerating compared with the previous thirty years is further complicating the story. Some observers have suggested that this slowdown may be the beginning of the end of the China story. But in doing so they fail to recognize that one of the main reasons China is slowing is because the authorities there believe that a better quality of growth is necessary now, and that the ­medium-term sustainability of growth will be enhanced by slowing down from past rates of expansion.

      Why has China decided that ‘less is more’? There are a number of important structural reasons, and also one ­shorter-term cyclical reason. Following the 2008 global credit crisis, which at its most severe in late 2008 threatened the collapse of the financing of world trade, Beijing unleashed a huge monetary and fiscal expansion to offset the slowdown in Chinese exports and to stimulate growth. The expansionary policies were oriented towards boosting infrastructure investment. Where necessary, direct state-backed investment was stepped up. The policy worked all too well because by late 2009 real GDP growth was already surprisingly strong, and it quickly became apparent that such aggressive counter-cyclical policies were increasing inflationary pressures and exacerbating some deep-seated structural problems in the economy. For example, as early as September 2009 Chinese policymakers were worried about a property market bubble developing, and they began to introduce a series of steps aimed at limiting excessive speculative purchases in China’s cities. Beyond the specific challenges of the property market, policymakers also grew understandably worried about signs of an unwelcome surge in inflation. The dramatic escalation of the European economic and financial crisis dominated the attention of Western analysts and policymakers in 2010. But in China, where the financial crisis is known as the ‘North Atlantic crisis’, getting inflation back down to 3–4% from