According to senior investor David Roche, China’s economic model is “washed up on the beach” and “not going to take off again,” which will have a significant influence on global markets.
Despite a stunning surge in world markets this year, fears about the possible rippling impact of a lengthy recession in China have grown.
Beijing has acknowledged current economic difficulties and suggested greater fiscal policy assistance, while the People’s Bank of China reduced interest rates unexpectedly on Tuesday. Over the last two decades, China has witnessed rapid development that has exceeded that of industrialized countries, surpassing Japan as the world’s second-largest economy. However, many economists now expect a lengthier structural downward trend as property and manufacturing — the traditional cornerstones of China’s fast economic boom — contribute less.
The ruling Chinese Communist Party has set a 5% growth target for 2023, which is lower than typical and notable for a country that, according to the World Bank, has averaged 9% annual GDP growth since opening up its economy in 1978. Some experts now believe Beijing will fall short of that aim.
On Thursday, Roche, president, and global strategist at Independent Strategy, told CNBC’s “Squawk Box Europe” that global stock markets had failed to price in a long-term reduction in manufacturing’s importance in fueling developing market economies.China’s economic model
“We all buy goods with more services in them than metal, for example, so even manufacturing output is full of services,” said Roche, who accurately forecast the onset of the Asian crisis in 1997 and the global financial crisis in 2008.China’s economic model
He went on to say that nations that have traditionally exported manufactured products will struggle to achieve substantial development in that sector, resulting in “big disappointments in populations, more geopolitical problems, and more riots in the streets.”China’s economic model
“The Chinese model is clearly washed up on the beach with a huge number of legacy holes in it, and it’s not going to take off again,” said Roche. CNBC’s request for comment was not immediately responded to by the Chinese Embassy in London.
“They don’t have the approach to surgically get rid of bad debts and bad assets, and they won’t be able to rely on their traditional measures of growth.” That is the major issue.”China’s economic model
China halted the distribution of statistics on young unemployment, which had just reached record highs, on Tuesday, while July economic data revealed a widespread downturn exacerbated by the country’s housing market fall.
According to Roche, China’s shifting demographics mean that the country no longer has enough young people to warrant a complete renewal of its real estate cycle – a market that is generally estimated to fuel between 20% and 30% of the country’s GDP.
Along with the various crises engulfing developing markets ranging from Latin America to Russia to Niger and the Sahel region of Africa, Roche stated that a major downside risk that markets have yet to price in is that profit margins will need to be squeezed in order for developed markets in the West to sustainably bring inflation down.
When all of these concurrent dangers are considered, he believes the market is due for a “very big” downward correction.
As a result, Roche advised investors to “slowly accumulate” U.S. Treasurys and safe haven assets with yields at their present low levels. China’s economic model
“I do believe that, unlike during the Great Moderation years, when you were never paid to hold cash or bonds,” he continued.