How China’s shifting growth picture could affect global markets

According to David Roche, president of Independent Strategy, China’s economy will be forced to recalibrate because of a “broken” world order, and the new drivers of growth will “disappoint” global markets.

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

President Xi Jinping and other officials took aim at 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 US did not “pull the brakes”.

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

“China now knows that if it wants to achieve its growth, it has to be done domestically, which means reforms that haven’t been implemented yet, and it means consumers have to spend pots of excess savings, which it is doing very hesitantly.” he said .

Roche also noted that “US hegemony is now broken” in the global economic order, with Russia and China breaking away from Western democracies. He stressed that a third fragment has formed in the “big south,” which includes countries like Brazil and India, which he said do not openly side with authoritarian powers like Russia, but also prioritize their own interests and resist Western pressure to break the economy. or military ties.

In a research note last week, Moody’s said the external environment will continue to be challenging for China as the US and other high-income countries reposition their technology investment and trade policies in the face of growing geopolitical and security concerns.

Roche said Beijing is well aware that the US will try to curtail its global influence by widening the “technology gap”, which it expects to widen from five to 10 years now to about 20 years. To do this, he expects Washington could use its power to monopolize trade with countries that innovate in areas of technology that can serve both missiles and cell phones, such as the semiconductor industry in the Netherlands.

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

Mining stocks reacted with trepidation on Monday to the Chinese Communist Party’s cautious growth prospects, given the importance of Chinese operations in the sector. Roche argued that “what will disappoint in China is the way growth is achieved” as infrastructure using Australian or US mineral imports will no longer be able to lift the economy out of crises.

“I think the way China needs to go now is to mobilize its own masses to spend their money, trust the government and not build up excess savings. the world economy, because it is the engine of the Chinese economy,” he said. “I think that model is as dead as a duck.”

Centralization and defense over economics

While Beijing’s ambitious growth project seems to have taken a backseat for now, NPC leaders focused heavily on national security and 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 an underestimate.

The Communist Party also continues to subordinate state institutions to its will, which reduces the autonomy of technocrats and civil servants in favor of political leadership.

“These actions will reduce the already limited degree of checks and balances that existed between the party and the 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 further investment restrictions are therefore likely, at least from the US, concluded BCA Research strategists.