How China’s changing growth picture could impact global markets

According to David Roche, chairman of Independent Strategy, China’s economy will be forced to reorganize due to a “fragmented” global order, and new drivers of growth will “disappoint” global markets.

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

President Xi Jinping and other officials have hit out at the West for stifling China’s growth prospects, as relations between Beijing and Washington deteriorate. New Chinese Foreign Minister Qin Gang said that Sino-US relations have left a “rational path”. and warned of conflict if the US didn’t “hit the brakes.”

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

“China now knows that if it is to achieve its growth, it must achieve it domestically, which means reform that has not yet been done, and that means spending pots of additional savings to the consumer. for, which many hesitate to do,” he said.

Roche also said that “America’s hegemony is now fractured” in the global economic order, with Russia and China drifting away from Western democracies. He highlighted that a third segment has formed in the “Big South”, including countries such as Brazil and India, which he indicated are not openly siding with authoritarian powers such as Russia, but are pursuing their own interests. are also giving priority to Resisting Western pressure to break economic or military ties,

Moody’s said in a research note last week that the external environment will remain challenging for China, as the US and other high-income countries shift 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 seek to reduce its global influence by increasing the “technology gap”, which it expects to grow from five to 10 years at present to about 20 years. To do this, he speculates, Washington could use its power to monopolize trade with countries that innovate in areas of technology that are capable of serving both missiles and cellphones – such as semiconductors in the Netherlands. Industry.

Moody’s said, “Additional measures by Western countries to restrict investment flows into China, block access to technology, restrict market access for Chinese firms, and promote diversification policies, with regard to doing business in China may continue to weigh on the risk appetite of foreign investors. Last week’s note. “These measures also have the potential to undermine China’s economic outlook.”

Mining stocks reacted with jitters on Monday to the Chinese Communist Party’s cautious growth outlook, given the importance of Chinese operations in the region. Roche argued that “the way growth has been achieved in China will disappoint,” because infrastructure using Australian or American mineral imports will no longer be able to lift the economy out of crisis.

“I think China now has to mobilize its public to spend its money, trust the government and not hoard excess savings, so it will all be travel and shops and restaurants, and very few heavy goods, which we All want to be seen as the motor of the world economy, because it is the motor of the Chinese economy,” he said. “I think the model is dead as a duck.”

Centralization and Defense on Economics

While Beijing’s ambitious development project has been on the backburner for now, NPC leaders have focused heavily on national security and domestic political centralization of power.

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

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

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

BCA Research strategists concluded that negative reactions and further investment restrictions are likely, at least from the US.