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Jim O’Neill: Mr. BRIC is still bullish on China

Goldman Sachs Asset Management chairman Jim O’Neill

FORTUNE — Ask most investors for their list of concerns for 2013, and China is on it. Jim O’Neill is an exception — and it’s not much of an exaggeration to say he has staked his career on that country’s success. Back in 2001, when most of us were still dazed by the dotcom bust, O’Neill created the acronym BRIC, which stands for Brazil, Russia, India, and China. He proclaimed that those emerging economies, China’s in particular, would drive markets for the next decade. The financial crisis notwithstanding, he has been broadly correct. Now some fear a bust in the world’s second-largest economy. O’Neill, the 55-year-old chairman of Goldman Sachs Asset Management (GS), which oversees more than $800 billion, remains optimistic. He predicts a transition from manufacturing to consumption that will create a rare soft landing. And he thinks that Chinese stocks, along with battered markets in Japan and Europe, will lead the pack in 2013. Edited excerpts:

Lately people such as Morgan Stanley strategist Ruchir Sharma have been critical of the BRICs, arguing that investors shouldn’t count on them.

It really depends on what people expected. How anyone in their right mind could seriously have expected China to continue to grow at 10% I’m not really sure.

His claim is not just that China hasn’t lived up to its expected 10%. He’s saying China isn’t even going to grow 5%.

China slowed in 2010 and 2011 because policymakers were very worried about inflation, which was way above target for a brief period and of course linked to a very dramatic rise in urban house prices. And they deliberately slowed it. To argue that China is in the process of slowing to 5% or less — anyone is entitled to a view, but I don’t see what premise it’s based on.

Well, the Chinese have moved to cities, and they’re aging. So the demographic wind won’t be at China’s back anymore.

First of all, they’re probably only about halfway through urbanization. Second, the fact that people are suddenly saying, “Oh, China’s got a demographic challenge.” I’m like, “Where have you all been sleeping for the past decade?” It’s been known by those who follow it closely and, most importantly, by Chinese policymakers. That’s why they’ve been focusing on better quality of growth and boosting their productivity rather than rely on sheer numbers of people urbanizing. I see things to worry about in India and Brazil, but if anything, China is doing better than I expected.

What’s your fear about India and Brazil?

The Indians just sort of assume they can grow at 8% without doing anything. Contrary to China, they find it really difficult to change policies. India badly needs to allow more foreign investment to boost productivity.

Brazil’s basic problem has been that their currency became far too overvalued. That added to their second problem, that the noncommodity sector of their economy is not very competitive. Unless they can do something to boost their noncommodity industries, Brazil might continue to struggle. But I add that they’ve done things to reduce the strength of their currency this year that are risky but quite impressive.

People have been attributing another acronym — MIST, for Mexico, Indonesia, South Korea, and Turkey — to you. Will the MISTs do better than the BRICs?

I can’t see why, though I know it’s a very fashionable story at the moment.

So it’s a fashionable story attributed to you that you don’t even buy into?

The acronym came about because we wrote about growing economies, which mentioned the BRICs and the four others. Some South Korean journalist got hold of that and wrote that I had created a new acronym, which was the first I’d heard about it. All those countries are interesting places and will probably do well. And some may have brief periods where they grow more strongly than China, but I think it’s very unlikely. South Korea has worse demographics than China. Mexico, Indonesia, and Turkey do have very positive demographics, but they have lots of issues as well.

You say China is changing from an export economy to a consumer economy. Which countries will benefit?

I think Mexico is a really big winner, because China can’t compete in the low-value-added industries that it did the past 15 years. And Mexico suffered badly from that. Italian luxury-goods makers continue to be winners, as do German companies. It’s the right play because the Chinese consumer is the biggest investing story of this decade. And it’s quite possible the U.S. will benefit. Apple (AAPL) already has 20% of its sales in China. If it’s going to continue to be a powerhouse, it will be because of China.

Where are you putting your money?

I think European equities continue to be very attractive because of valuation. I find that the single most interesting stock market going into 2013 is Japan because it’s really cheap, and of course, it may well be that the monetary authorities decide to out-QE the Fed. If that’s the case, the Japanese market will do very well the next six months. And China. The winners and losers internally are going to be different, but in general Chinese equities should have a better 2013 than 2012 or 2011.

This story is from the January 14, 2013 issue of Fortune.