China’s growing economic might is good for UK

Hey big spenders: two Chinese shoppers outside a Gucci store in Shanghai

11 April 2012

As Barack Obama visits Beijing, Goldman Sachs' expert on emerging markets argues London - rather than New York - is uniquely poised to benefit from China's boom...

Eight years ago this month, I was fortuitous enough to coin the phrase "Bric", an acronym for Brazil, Russia, India and China.

It is undoubtedly the case that the C in Bric has so far been rather more important than the others. Based on two recent trips there since the start of October, one of which involved some travel around parts of that vast country, it is set to remain so.

Indeed, I continue to think that in economic terms China is probably the most important phenomenon of not only our but also our children's generation. If we play our cards smartly, then given the time zone the UK finds itself in and the coincidence that English is the preferred language for international business including on the internet, this should be great news for us, especially London.

The statistics about China are amazing. At the end of 2008, the US dollar value of China's GDP was about $4.3 trillion. As recently as 2001, it was around $1.3 trillion — in other words, China's GDP has increased by about $3 trillion in just seven years.

By the end of next year, we reckon it will have risen to about $5.4 trillion, which means it will have comfortably overtaken Japan to be the world's second-largest economy.

To put just the past seven years in perspective, China has increased by the same size as the equivalent of seven 2001 Indias, or almost three 2007 Indias. In fact, China has seen its nominal GDP grow as much in that period as all the other Bric countries combined. If you bring it closer to home, its rise in that short space of time has been equivalent to creating almost two new Britains in seven years. At its current momentum, it will be growing another new UK every three or four years.

When we first suggested in 2003 that China could possibly challenge the US to be the world's number one by 2041, many thought it was a pipe dream and had virtually no chance.

In fact, it is possible a lot sooner. Indeed, we now think it could happen within 20 years — in 2027 to be precise, so 18 years.

In order to become as big as the US, China simply needs to see its dollar value of GDP rise by 10% on average for each of the next 18 years. It doesn't need to show real GDP growth of 10%, just the dollar value rise by that. This is likely to occur with real growth of around 6%- 8% and some appreciation — eventually — of its currency.

What does this mean for Britain and London? First, our language, our geographic position and — despite the regulatory shortfalls of recent years — our legal system stand us in a position second to none. As much as Shanghai is being developed as an international financial centre and Hong Kong is enjoying yet another of its remarkable booms, London's place at the centre of the global time zone is unique. It is a huge advantage for us over New York, which is critically five hours "further back", that its working hours don't overlap with those of China.

I occasionally worry for Britain, given American ingenuity, that one day they will simply change the world's clocks and put everyone on to New York Mean Time. But until that day, it is a huge benefit for London (not quite as important, but not to be dismissed, the same is also true for Mumbai and Moscow).

I've been to China twice recently — the second visit was a long one, with my wife. We travelled to Shanghai, on to Guilin, through the scenic Li River valley area, up north to Beijing, and spent some time walking on the Great Wall before returning to Beijing for me finally to do some work.

Shanghai is like a giant building site as it prepares itself for Expo 2010. The Bund is being rebuilt, and large swathes of cranes can still be seen all over the city. Arriving and leaving the wonderfully efficient airport, we marvelled at the machine by passport control that requested our opinion as to whether the service had been extremely good, just good, average or poor.

Perhaps we could have one of those introduced at Heathrow for our departure and arrival?

We walked for miles and miles around Shanghai for two days. You can witness the emergence of a vast urban middle class first hand. Many of the world's top luxury brands are there, and I found my mind constantly trying to think of the brands one might want to make a bet on succeeding. We had been forewarned that to wander so far would require the aid of a fluent Chinese speaker but, except for the odd taxi, this was not a problem.

The desire to use English, our language, was widespread, including on their efficient subway, and of course, on the world's fastest railway, the Maglev. To our astonishment, we found the English language was also used in villages around the River Li.

One day, we hired bikes to cycle around and, in two of the tiniest villages, we came across the most amazing billboard on dilapidated buildings: "Succeed in English, succeed in life." Incredible.

Soon after, we were drifting down the River Yulong on a bamboo raft, and meandered past an internet café. We found the same sort of evidence everywhere we went, including around the Great Wall, where I hadn't been for many years.

As I have believed for many months this year, the great global credit crisis has also probably been good for China, and made our 2027 guestimates more, rather than less, likely. Indeed, in some ways, it almost seemed like an act of God. Anybody that studied pre-crisis China and its role in the world, as I did, knew that China couldn't continue to see huge export growth unchallenged — it was something that would result in the most almighty clash with Washington and Brussels, and we could end up with a wave of protectionism.

But the credit crunch, forcing the beginning of a new, more sensible life for the US consumer, has obliged China to deal with the consequences of reduced exports. In its place, there is a new phenomenon: welcome to the age of the Chinese consumer.

The country has just taken over as being the world's number one car market and, for the first time in decades, global car companies are beginning to smile. You can see lots of evidence of rising consumption in and around Tiananmen Square in Beijing, at both ends of the spectrum.

I went to visit Qeelin, a small upscale jewellery store in which I invest. As I arrived, three young women had just bought some nice-looking pieces. Business is clearly good.

I went there, straight from a visit to Mao's tomb, where along with literally tens of thousands of others, I queued to see his resting body. You could buy a small bunch of flowers for three yuan, about 30p. Hundreds of people, most of whom appeared to be rural visitors, were eagerly doing so — despite the probability that, such were the crowds, the flowers would soon be returned to the store where the tourists had bought them as the space they were allowed to lay them vanished in minutes. No doubt in a few years' time, the type of flower and its price will have escalated.

When I left Beijing to fly home, I made a point of pressing the "extremely good" button at passport control, and told myself this is really good for everybody, including everyone back home. Eleven hours later, I arrived at Heathrow, and while reflecting "why can't this place be like Beijing airport?" I was also thinking: "Thank God for the English language."

Jim O'Neill is chief economist at Goldman Sachs

China’s growing economic might is good for UK

Read More