How China’s altering progress image may hit world markets

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

Future Publishing | Future Publishing | Getty Images

China’s economy will be forced to recalibrate due to a “broken” world order and the 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 target of “around 5%” growth in gross domestic product in 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, raising the budget deficit target to 3% this year from 2.8% in 2022.

President Xi Jinping and other officials have targeted the West to limit China’s growth prospects as Beijing-Washington relations continue to deteriorate. New Chinese Foreign Minister Qin Gang said Sino-US relations have strayed from a “rational path” and warned of conflict if the US does not “put the brakes on”.

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

“China now knows that if it wants to achieve its growth, it has to achieve it domestically, which means reforms that haven’t been implemented yet, and it means getting the consumer to spend pots of excess savings, which it only can.” very hesitantly. ” he said.

Roche also noted that “US hegemony in the global economic order is now broken” as Russia and China break away from Western democracies. He stressed that a third fragment had formed in the “big south,” including countries like Brazil and India, to which he signaled not to openly side with authoritarian powers like Russia, but also to prioritize their own interests and those of the West Resist pressure to separate from business or military ties.

In a research note last week, Moody’s said the external environment will remain challenging for China as the US and other high-income countries rebalance their technology investments and trade policies amid growing geopolitical and security concerns.

Roche said Beijing is aware that the US will try to limit its global influence by widening the “technology gap,” which it expects will widen to about 20 years from the current five to 10 years. To do this, he reckons, Washington could use its power to monopolize trade with countries innovating in technology areas capable of serving both missiles and cellphones — like the semiconductor industry in the Netherlands.

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

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

“I think the way China has to go now is to mobilize its own masses, spend their money, trust the government and not accumulate excessive savings, so everything will happen in travel and in shops and in restaurants and a lot less into the heavy stuff that we all want to see as the engine of the world economy, because it’s the engine of the Chinese economy,” he said. “I think this model is dead as a duck.”

Centralization and defense over the economy

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

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

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

“These measures will reduce the already limited level of controls and counterbalances between party and state, while signaling to the outside world that China continues to pursue centralization and national security before decentralization and global economic integration.”

Negative reactions and further investment restrictions are therefore likely, at least from the USA, concluded the strategists at BCA Research.

Comments are closed.