How China’s changing growth picture can hit global markets

The Chinese economy will be forced to recalibrate due to the “torn” world order, and new engines of growth will “disappoint” global markets, according to David Roche, head of Independent Strategy.

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

President Xi Jinping and other officials have targeted the West to constrain China’s growth prospects, as relations between Beijing and Washington continue to deteriorate. China’s new foreign minister, Chen Gang, said that Sino-US relations had left a “rational path” and warned of conflict if the US did not “put on the brakes”.

Roche, a veteran investment analyst, 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 have to look inward to realize its growth ambitions.

“China now realizes that if it’s going to have its growth, it has to do it domestically, which means a reform that hasn’t been implemented yet, and that means getting the consumer to spend some amount of excess savings, which they are very reluctant to do,” he said.

Roach also noted that “US hegemony is now fractured” in the global economic system, with Russia and China breaking away from Western democracies. He highlighted that a third fragment has formed in the “Great South”, including countries such as Brazil and India, which he noted do not explicitly side with authoritarian powers such as Russia, but also prioritize their own interests and resist Western pressure to cut off the economy. or military relations.

In a research note last week, Moody’s said the external environment will continue to be challenging for China, as the United States and other high-income countries realign their technology investments and trade policies in light of heightened geopolitical and security considerations.

Roche said that Beijing is well aware that the United States will reduce its global influence by increasing the “technology gap”, which he expects to widen from five to ten years now to about 20 years. To do this, he expects Washington to use its power to monopolize trade with countries innovative in areas of technology capable of servicing both missiles and cell phones — such as the semiconductor industry in the Netherlands.

Moody’s said in its report: “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 affect foreign investors’ perception of risk in doing business.” business in China. note last week. “These actions also have the potential to dampen China’s economic outlook.”

Mining stocks responded with trepidation on Monday to the Chinese Communist Party’s cautious growth outlook, given the importance of Chinese operations in the sector. What will disappoint in China, Roche argued, is the way growth is achieved, as infrastructure that uses mineral imports from Australia or the United States will no longer be able to lift the economy out of crisis.

“I think the way China has to go now is get its masses to spend their money, trust the government, not hoard excess savings, so it’s all going to happen in travel and in shops and restaurants, much less in the heavy stuff, which we all want to see drive For the global economy, because it is the engine of the Chinese economy. “I think this model died like a duck.”

Centralization and defense of the economy

While Beijing’s ambitious growth project has seemingly taken a back seat for the time being, leaders in the NPC have placed a heavy emphasis on national security and the 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 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 the political leadership,” said the Canadian Investment Research firm.

“These measures 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 over decentralization and global economic integration.”

Thus, negative feedback and further investment restrictions are likely, at least from the United States, BCA Research strategists conclude.