How China’s moving growth picture could affect global markets

China’s economy will have to rebalance due to a “broken” world order, and the new drivers of growth 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 rate for more than three decades and below 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 targeted the West for curbing China’s growth prospects, as relations between Beijing and Washington continue to deteriorate. China’s new foreign minister, Qin Gang, said Sino-US relations had left a “reasonable path” and warned of conflict, unless the US “hits the brakes.”

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

“China now knows that if it’s going to achieve its growth, it has to achieve at home, which means reform that hasn’t been done yet, and it means making the consumer to spend pots of savings, which is very reluctant to do,” he said.

Roche also noted that “US hegemony is now broken” in the world economic order, with Russia and China separating from Western democracies. He pointed out that a third segment has formed in the “big south,” including countries like Brazil and India, which he said are not overtly aligned with authoritarian powers like Russia. , but that they also prioritize their own interests and resist Western pressure to freeze the economy. or military connections.

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 reset their technology investment and policies their trade due to growing geopolitical and security issues.

Roche said Beijing is well aware that the US will try to reduce its global influence by widening the “technology gap,” which it plans to extend from the current five to 10 years to about 20 years. To do this, he expects that Washington could use its power to trade with countries that are innovating in areas of technology capable of serving both missiles and cell phones – such as semiconductor industry in the Netherlands.

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

Mining stocks reacted with confidence on Monday to the Chinese Communist Party’s cautious growth outlook, given the importance of Chinese activity in the region. Roche argued that “what will disappoint in China is how growth is achieved,” as infrastructure using Australian or US mineral imports will not be able to power the economy out of crisis.

“I think the way China needs to go now is to get its own masses to spend their money, trust the government, and not accumulate too much savings, and so it will all happen in travel and in shops and in restaurants, and much less in the heavy duty stuff, which we all want to see as the motor of the world economy, because it is a motor it’s the Chinese economy,” he said. “I think that model is dead as a duck.”

Centralization and protection over economy

While Beijing’s ambitious growth project appears to have taken a backseat for now, leaders at the NPC focused heavily on national security and the centralization of domestic political power.

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

“The Communist Party is also continuing the process of subjugating state institutions, which will reduce the autonomy of technocrats and the civil service for political leadership,” said the Canadian investment research firm.

“These actions will reduce the level of checks and balances that already existed between the party and the state, while signaling to the outside world that China is continuing to moderate and national security over decentralization and global economic integration. “

So there will likely be negative reactions and further investment restrictions, at least from the US, BCA Research strategists concluded.