China's economic model is 'washed up on the beach,' says veteran investor David Roche

On May 13, 2022, in Beijing, China, one could witness the radiant evening hues enveloping the cityscape, casting its glow over towering structures and even a dazzling ferris wheel.

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According to experienced investor David Roche, China's economic model has reached its peak and is unlikely to revive, leading to significant consequences for worldwide markets.

In spite of an impressive surge in stock markets up until now in this year, worries have been escalating regarding the possible impact of a long-lasting economic decline in China.

Beijing has acknowledged the current challenges to its economy and has shown its intention to provide further support through fiscal policies. Surprisingly, the People's Bank of China decided to decrease interest rates on Tuesday. China has witnessed remarkable growth that has surpassed that of developed nations in the last two decades, surpassing Japan to become the second-largest economy globally. Nevertheless, numerous economists now predict a prolonged decline in the country's economy due to the decreasing impact of the property and manufacturing sectors, which have been the key drivers of China's rapid economic progress.

The governing Chinese Communist Party has established a goal of achieving a 5% growth rate by 2023. This objective appears to be lower than the usual targets set by the Party and surprisingly modest for a nation that has consistently experienced an average annual GDP growth of 9% since opening up its economy in 1978, according to the World Bank. Some economists are now speculating that Beijing might not even achieve this goal.

According to Roche, who serves as the president and global strategist at Independent Strategy, the global stock markets are not accurately reflecting the prolonged decrease in the significance of manufacturing in fueling the economies of emerging markets.

According to Roche, who accurately anticipated the emergence of the Asian crisis in 1997 and the global financial crisis in 2008, we often purchase products that contain a greater abundance of services rather than just raw materials. Consequently, the manufacturing sector also includes a substantial portion of services within its outputs.

He stated that economies that traditionally sold manufactured products to other countries will face difficulties in producing significant growth in that area. This, in turn, will lead to "significant letdowns among populations, increased geopolitical issues, and more instances of civil unrest."

Roche expressed that the Chinese approach is undeniably ineffective and filled with numerous outdated flaws, and it won't gain momentum once more.

They lack the strategy to effectively eliminate unpaid debts and problematic assets, and simultaneously, they cannot depend on their customary methods of progress. This poses a significant challenge.

On Tuesday, China made the decision to halt the publication of data concerning the rate of unemployment among young individuals, an issue that has been reaching unprecedented levels lately. Meanwhile, the economic data for July revealed a general decline, worsened by the downturn in the country's real estate sector.

During a media briefing held on Wednesday, the Chinese Foreign Ministry spokesperson, Wang Wenbin, addressed worries about the impact of China's economic downturn on global growth. He emphasized that China's recovery is progressing well and is positioned on a stable path. Additionally, he stated that China continues to play a significant role as a growth catalyst for the global economy. Mr. Wenbin highlighted that China recorded a growth rate of 5.5% in the first half of 2023 compared to the previous year.

He emphasized that a larger proportion of the economic growth comes from domestic demand and also indicated that ongoing improvements to industrial infrastructure, investments in advanced industries, and increasing exports of electric vehicles, lithium batteries, and solar panels illustrate the strength of China's foreign trade despite declining global demand.

Wang stated that we are already witnessing the outcomes of our actions. Recently, China has implemented a range of specific and meaningful actions with the objective of stimulating consumption, enhancing the private sector, and drawing in foreign investments. These measures have gained praise from investors both within China and abroad.

The economy of China has a great capacity to recover from setbacks, a lot of room for growth, and a powerful force for change. The underlying factors that support China's steady economic progress in the future remain unaltered.

Roche proposed that the shifting population dynamics in China imply that there is currently an inadequate number of young individuals to warrant a full rejuvenation of its property market, which is often believed to drive approximately 20% to 30% of the nation's GDP.

In addition to the numerous problems afflicting emerging markets, such as Latin America, Russia, Niger, and the Sahel region in Africa, Roche mentioned that there is a significant potential danger that markets have not factored in - the necessity of reducing profit margins in developed markets in the Western world to achieve lasting inflation control.

He proposed that the market is poised for a significant decline, once all of these numerous concurrent risks are eventually factored in.

Therefore, Roche advised investors to consider gradually acquiring U.S. Treasurys and secure assets that currently offer attractive returns at low prices.

"I believe that, unlike in the years of the Great Moderation—when you didn't receive any compensation for keeping cash or holding bonds—this is not the case anymore," he stated.