China spending to cushion slowdown

The mainland's economy has shown resilience and undergone a gradual transition towards being driven by domestic consumption, says Goldman Sachs economist Jim O'Neill.

Speaking during a visit to Hong Kong last week, O'Neill - who invented the acronym BRIC to describe the emerging economies of Brazil, Russia, India and China - said a pickup in a series of leading indicators signalled a soft landing for the world's second-largest economy.

Meaningful real wage growth had bolstered domestic sentiment and spending, O'Neill said, though the monopoly position of state-controlled financial institutions was likely to face headwinds as the country's top policymakers urged further openness and market-driven competition.

Elsewhere, Japan was likely to witness a reversal in its economic fortunes caused by a sharp weakening of the yen, which was likely to remain under downward pressure in the short term. The path to recovery will face a handful of structural challenges, including a rapidly ageing population and weak domestic demand.

O'Neill ruled out a hard landing for the slowing Chinese economy, noting that retail sales versus industrial production, which is a measure of the vitality of domestic consumption, had picked up in recent months. The pickup was likely driven by the gradual transition towards a greater share of domestic consumption in the country's economy.

"Growth forecasts from Jim O'Neill" Video by Hedy Bok

O'Neill, chairman of Goldman Sachs Asset Management, forecast that China's overall economic output would decelerate to about 7 per cent annual growth over the next decade, compared with average annual growth of 10 per cent over the last two years. He praised the policymakers in Beijing for being "realistic" and "pragmatic" in embracing lower-paced but higher-quality growth.

The A-share stock market in Shanghai was "very close to trough level", O'Neill said.

"Equity valuations in Shanghai have fallen a lot compared with United States equities, providing a compelling reason to buy in at very attractive levels," O'Neill said. He favoured an investment theme of domestic consumption at the expense of financials amid signs that China was undergoing structural change that created fruitful investment opportunities.

According to Goldman Sachs, a cyclically-adjusted price-to-earnings ratio for China is currently at about 13.2 times, compared with its historical average of 17.4 times. The US is currently trading at an expensive valuation of 22.3 times, much higher than its historical average of 18.7 times, probably because of the country's bond-buying programme that lifted asset prices.

O'Neill also expected Japanese equity prices to rise in the next six months, helped higher by a weakening yen.

"If Shinzo Abe [the former prime minister] wins the election, the Bank of Japan might try to do something to resolve the lingering structural problems," he said.

Goldman believes the US impasse over its budget and fears of a so-called fiscal cliff are likely to be resolved by the end of this year, since politicians in Washington and US President Barack Obama could come to a deal that incorporated tax breaks and reduced government spending.