Traders work on the floor of the New York Stock Exchange (NYSE), August 15, 2023.
Brendan McDermid | reuters
Seasoned investor David Roche says China’s economic model has “washed up on the beach” and is “not going to move again”, which will have a major impact on global markets.
Despite a notable rally in stock markets so far this year, concerns are growing about the potential impact of a prolonged recession in China.
Beijing has accepted its immediate economic headwinds signaled more fiscal policy supportWhen People’s Bank of China unexpectedly cut interest rates on Tuesday. China has experienced tremendous growth over the past two decades, outpacing developed countries and overtaking Japan to become the world’s second largest economy. However, many economists now see a protracted structural downward trend amid declining contributions from property and manufacturing – the traditional pillars of China’s rapid economic expansion.
The ruling Chinese Communist Party has set a growth target of 5% for 2023 – which is below normal objectives and particularly modest for such a country. World Bank says It has averaged 9% annual GDP growth since opening its economy in 1978. Some economists now think Beijing may miss even that target.
Global stock markets have failed to price in a long-term decline in the role of manufacturing in powering emerging market economies, Roche, president of Independent Strategy and global strategist, told CNBC’s “Squawk Box Europe” on Thursday.
“For example, we all buy goods with more services than metals, so manufacturing output is also full of services,” said Roche, who correctly predicted the development of the 1997 Asian crisis and the 2008 global financial crisis. It was
He added that economies that have historically exported manufactured goods would struggle to generate any meaningful growth in that sector, leading to “greater frustration among populations, more geopolitical problems and more rioting in the streets.”
“The Chinese model has clearly been washed up on the beach and has a huge number of old holes in it, and it’s not going to start up again,” Roche said.
“They really don’t have the vision to surgically get rid of bad loans and bad assets, and at the same time, they won’t be able to rely on their traditional measures of growth. That’s the big problem.”
China on Tuesday Release of data on youth unemployment suspendedWhich recently reached a record high, while July’s economic data showed that the country’s economy has entered a broad slowdown. property market slump, The Chinese embassy did not immediately respond to CNBC’s request for comment.
Roche suggested that changing demographics in China mean that the country no longer has enough young people to justify a complete renewal of its real estate cycle – a market often estimated at between 20 and 30% of the country’s GDP. It happens.
With various crises engulfing developing markets from Latin America to Russia to Niger and Africa’s Sahel region, Roche said a major downside risk that markets have not yet settled on is whether to grow profitably. Margins will need to come down. Western markets to bring down inflation steadily.
He suggested that once these multiple concurrent risks are finally taken into account, the market is in for a “huge” drop.
As such, Roche suggested investors should “slowly accumulate” US Treasuries and safe-haven assets that currently offer yields at cheap levels.
“I think that unlike the Great Moderation years – [when] You never got paid for holding cash or holding bonds — now you get,” he said.