How China’s Shifting Growth Could Affect Global Markets

  • Veteran investment strategist David Roche told CNBC’s “Squawk Box Europe” on Tuesday that “things have changed” permanently when it comes to China’s role in the global economy.
  • On Sunday, during its National People’s Congress, the Chinese government announced a growth target of “about 5%” in gross domestic product in 2023, the weakest in the country for more than three decades.

A shopping mall in Qingzhou, Shandong province broadcasts the opening ceremony of the National People’s Congress of China on Sunday, March 5, 2023.

Edition of the future | Edition of the future | Getty Images

China’s economy will be forced to recalibrate due to a “fractured” global order, and new growth drivers will “disappoint” global markets, according to David Roche, president of Independent Strategy.

At its National People’s Congress on Sunday, the Chinese government announced a growth target of “about 5%” in gross domestic product in 2023 – the lowest for the country in more than three decades and below the 5.5% expected by economists. The administration has also proposed a modest increase in fiscal support for the economy, raising the budget deficit target from 2.8% in 2022 to 3% for this year.

President Xi Jinping and other officials have criticized the West for limiting China’s growth prospects, as relations between Beijing and Washington continue to deteriorate. China’s new foreign minister, Qin Gang, said China-US relations had left a “rational path” and warned of conflict if the United States did not “hit the brakes”.

Veteran investment strategist Roche told CNBC’s “Squawk Box Europe” on Tuesday that “things have changed” permanently when it comes to China’s role in the global economy, as Beijing will be forced to look to internally to achieve its growth ambitions.

“China now knows that if it wants to achieve growth, it has to achieve it domestically, which means reform that is not yet undertaken, and that means getting the consumer to spend pots of excess savings, which she is very hesitant to do,” he said.

Roche also noted that “US hegemony is now fractured” in the global economic order, with Russia and China breaking away from Western democracies. He pointed out that a third fragment has formed in the “deep south”, including countries like Brazil and India, which he says do not openly side with authoritarian powers such as Russia. , but also put their own interests first and resist Western pressure to break up the economy. or military ties.

In a research note last week, Moody’s said the external environment will remain challenging for China as the United States and other high-income countries reposition their technology investments and trade policies in light of considerations growing geopolitics and security.

Roche said Beijing was well aware that the United States would seek to reduce its global influence by widening the “technology gap”, which it expects to shrink from the current five to 10 years to around 20 years. To do this, he foresees that Washington could use its power to monopolize trade with innovative countries in technological fields capable of serving both missiles and cellphones, such as the semiconductor industry in the Netherlands.

“Additional measures taken by Western countries to restrict investment flows to China, block access to technology, restrict market access for Chinese companies and promote diversification policies could continue to weigh on the foreign investors’ perception of risk regarding doing business in China,” Moody’s said in the note last week. “These measures also have the potential to weaken China’s economic prospects.”

Mining stocks reacted with concern on Monday to the Chinese Communist Party’s cautious growth outlook, given the prominence of Chinese operations in the sector. Roche argued that “what will disappoint in China is how growth is achieved” as infrastructure using Australian or American mineral imports will no longer be able to pull the economy out of crises.

“I think the path China needs to take now is to mobilize its own masses to spend their money, trust the government and not accumulate excess savings, so everything will be in travel, shopping and restaurants, and much less in heavy equipment, which we all want to see as the engine of the global economy, because it’s the engine of the Chinese economy,” he said. “I think that model is dead like a duck.”

Centralization and defense on the economy

While Beijing’s ambitious growth plan has seemingly taken a back seat for now, NPC leaders have focused heavily on national security and the domestic political centralization of power.

The government expects the defense budget to grow by 7.2% in 2023, up from 7.1% in 2022, but BCA Research strategists suggested in a note on Tuesday that the official figure is often understated. estimated.

“The Communist Party also continues the process of subordinating state institutions to its will, which reduces the autonomy of technocrats and the civil service in favor of political leadership,” the Canadian investment research firm said.

“These actions will reduce the already limited degree of checks and balances that existed between party and state, while signaling to the outside world that China continues to pursue centralization and national security rather than decentralization and global economic integration. .”

Negative reactions and new investment restrictions are therefore likely, at least from the United States, the strategists at BCA Research concluded.

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