China's Economic Woes and Global Market Impact: Insights from Veteran Investor

China’s economic model has been described as “washed up on the beach” by veteran investor David Roche. Despite a strong rally in stock markets this year, concerns are mounting about the potential ripple effect of a prolonged slowdown in the world’s second-largest economy.

In an interview with CNBC’s “Squawk Box Europe,” Roche, the President and Global Strategist at Independent Strategy, pointed out that global stock markets are not factoring in the long-term decline in the role of manufacturing in powering emerging market economies. He emphasized that the market is likely to face a “very big” downward correction once concurrent geopolitical and macroeconomic risks are accurately priced in.

Roche’s view is that China’s economic model has reached a point of stagnation and is unlikely to recover. This situation will have a substantial impact on global markets. China’s remarkable growth over the past two decades, surpassing even developed countries, has been driven by its manufacturing and property sectors. However, these pillars have started to weaken, and the country is now experiencing a more sustained structural downturn.

Despite acknowledging the immediate economic challenges and introducing fiscal policy support measures, China’s growth target for 2023 has been set at 5%, which is lower than usual and reflects the changing economic landscape. Roche believes that the decline in manufacturing’s role will result in significant disappointments in affected populations, potentially leading to geopolitical tensions and social unrest.

Roche highlighted that China’s approach to managing bad debts and assets isn’t effective, and the country can no longer rely on traditional growth measures. As a result, he expects the Chinese economic model to continue facing challenges.

China’s economic slowdown has raised concerns about its impact on global growth. The Chinese Foreign Ministry has emphasized that the country’s recovery remains on track and that China remains an important engine for world economic growth.

Roche’s analysis extends beyond China, encompassing developing markets across various regions. He also predicts that developed markets will need to compress profit margins to bring inflation down sustainably, a risk that markets have not fully priced in.

Considering these factors, Roche recommends investors gradually accumulate safe-haven assets like U.S. Treasuries, given their currently attractive yield levels. He believes that the current economic climate differs from previous periods when holding cash or bonds didn’t offer attractive returns, making these safe-haven assets more appealing in the current market landscape.