China: The Great Transformation

Translation of latest article by Banque Heritage's CIO, Jean-Christophe Rochat, looking closer at the ongoing transformation of China's economy.

(Find the original article here:

In recent decades, the Party's commitment to the people has been to bring prosperity, which has translated into high growth and moderate inflation. This cardinal objective constituted the break with the country's turbulent economic history of the second half of the last century.

And then came COVID 19... Let us take a step back and try to see a little more clearly.

A very contrasted economic history

When the Chinese Communist Party and its leader Mao Zedong came to power in 1949, their fundamental goals were to transform China into a modern, powerful and socialist nation. Several key stages followed: the first Five-Year Plan, the Great Leap Forward, the Cultural Revolution, the Great Reform of the Economic System and Restructuring, and then the Economic Opening (Deng Xiaoping). For four decades, growth was strong but very unstable. Since the 1990s and WTO accession (2001), China's economy has really taken off.

cumulative real GDP growth

Between 1939 and 1945, China suffered from hyperinflation caused by excessive monetization by the Nationalist government. Then, in the early 1950s, moderating price changes became the main objective of the government, which introduced monetary reforms, nationalization of the banks, and strict controls on prices and money supply. These measures provided a certain stability in prices until 1979, with the exception of two episodes: the Great Leap Forward and the Great Famine.

  • The Party has honored its commitments to long-term growth. But inflation has stunned the country on several occasions.

The jamming of structural drivers

The following is true in both liberal and centrally planned economies: in the long run, economic growth is based on three main pillars:population growth, productivity and debt.

From a demographic point of view, China's aging is barely noticeable at the moment. But over the next 20 to 30 years, the country's demographics will worsen. Hence the recent reversal and abandonment of the sacrosanct one-child policy.

marked acceleration of aging is on the rise

Labor productivity has declined sharply in recent years, partly as a result of rising wages. One solution would be to speed up innovation and the adoption of new technologies. This is certainly a central theme of the five-year plans. But in practice, the US embargo on semiconductors will not help. Another solution would be to take advantage of lower energy prices. This may explain the recent Chinese sympathy for Russia...

end of the Chinese productivity miracle 

China has over-invested and over-leveraged in recent decades to support its economy. With the bursting of the real estate bubble, the government is beginning to tremble. The spectre of Japan (stuck in a liquidity trap), zombie companies and deflation since the 1990s lurks. Beijing should therefore continue to orchestrate the deleveraging of the economy, despite significant economic sacrifices.

  • China is no longer the world's ultra-competitive factory. It lacks the levers to turn the economy around in a sustainable way.

The great unknown of reopening

The reopening of the country after COVID 19 is welcome (and inevitable), as the Party cannot tolerate a third consecutive year of slump. Soft macroeconomic data (forecasts, surveys, etc.) and mobility data are already picking up. Hard data, on the other hand, is not expected to accelerate until the second half of 2023.

the reopening is underway 

The reopening poses a major dilemma, however, given the Party's aversion toward inflation. Too much inflation would push up interest rates, which is undesirable as the restructuring of residential real estate gets underway. Moderation is evident in the government's 2023 budget, which calls for a neutral fiscal policy. The deficit is expected to reach 3% of GDP (2.8% in 2022). The authorities are relying heavily on endogenous forces, notably private consumption, to raise GDP to 5%.

  • The party's unofficial, conservative target is 6% or even 7% for 2023.

The pressing issue of geopolitical anchoring, decoupling

China, which has been highly integrated into global trade since joining the WTO, avoided isolation when Trump withdrew the US from the proposed Trans-Pacific Partnership (TPP) in 2017, which was initiated by the Obama administration. Since then, China has not only applied to join its light version, the CPTPP, but is also developing its "Silk Road". From its position as the world's leading manufacturer, China is becoming a ¨pan-regional¨ trade hegemon.

The Shanghai Cooperation Organization (SCO), founded by China in 2001, is an intergovernmental organization of an economic and political nature that includes China, Russia, India, and four Central Asian countries. At Russia's initiative, it is working on a project to return to a new form of gold standard. This would involve organizing future trade settlements between Asia and Russia in gold, completely replacing the dollar and the euro. By the way, several other countries are candidates for the SCO, including Saudi Arabia and some Gulf emirates. Ultimately, the idea is to use gold to set the price of all major international commodities (oil, gas, food, fertilizers, metals and solid minerals). If China were to follow the same path, which is not unlikely in the medium term given its incessant purchases of precious metals, it would pose a major challenge to the fiat currencies, namely the dollar and the euro.

  • China seems to be economically and financially distancing itself from Western countries.
  • China has not openly crossed over to the opposite geopolitical camp - yet - but it is clearly open to it!

We believe that China's cyclical GDP recovery could reach 6% in the coming quarters before the country's growth slows to between 3% to 4%. Investing directly in China is an interesting opportunity, but both economic and (geo-)political factors make it difficult. We therefore prefer other (indirect) ways to play this economic recovery through specific countries, sectors or international companies that are exposed to China.

by Jean-Christophe Rochat, CIIA

(translated from French)

March 16, 2023


Portfolio manager industry: 360° market view

Interview with Marcos Esteve

December 14, 2023


Asset Management Association - Person of the Month, Jean-Christophe Rochat

Jean-Christophe Rochat, CIO and Head of Asset Management at Banque Heritage, shares his insights in this interview with Asset Management Association:

October 10, 2023


Finews interview with Marcos Esteve on Private Banking and Family Business

Read the latest interview by Finews with Marcos Esteve, CEO of Banque Heritage, here:

August 21, 2023

In order to ensure the usability of the website and to recognise your needs and preferences, we use cookies. Please press, "Accept" to agree to the use of cookies or press on the following link: Cookies policy to let us know your preferences regarding the use of cookies on our webpage.