Henry H. McVey | Global Macro & Asset Allocation - Third visit to Beijing & Hong Kong in 2026. On-the-ground assessment covering GDP drivers, AI, supply chains, consumers, and the investment outlook.
Tags: Stable GDP · AI Surge · Deflation Easing · Regime Change
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1. GDP growth is steady, not spectacular
Exports solid, AI investment strong, property drag now ~100bps vs. 370bps peak in 2022. No large stimulus-driven consumer inflection expected — government focused on fixing legacy imbalances in housing, LGFVs, and excess capacity.
2. Renminbi is strengthening — a signal of confidence
KKR expects 4–5% RMB appreciation per annum. Inbound tourism is rising sharply following visa easing. The bigger opportunity lies in rebalancing toward services as automation accelerates.
3. China's AI strategy is consumer-driven and cost-efficient
Unlike the US enterprise-heavy approach, China's AI adoption is grassroots, cheaper, and broadly trusted — 87% of Chinese respondents trust AI vs. only 32% in the US. Scale will determine winners.
4. Supply chains are resilient but not invulnerable
Domestic energy reliance (coal 61%, renewables 10%) cushions Middle East shocks. Pressure points: high-end memory chips and local government finance. Savings rate remains high at 32%.
5. Advanced manufacturing & robotics are a strategic priority
Robotics and automation are central to China's upcoming 15th Five-Year Plan. Applications span healthcare, logistics, and industrial production — KKR views the opportunity as significant.
6. Consumer behavior is segmented, not broad-based
Winners: discounters (PDD), membership models (Sam's Club), short-video commerce (Douyin — ~40% impulse purchase rate). Growth pockets in Tier III/IV cities. Consumer health and pet care are standout sectors.
7. Deflation may be nearing a bottom
After 42 consecutive months of PPI deflation, early signs of a turn are emerging. Multinational caution is creating PE carve-out opportunities. Anti-involutionary policies are beginning to restore pricing power at the margin.
8. More work still needed on structural reforms
KKR advocates building out healthcare and retirement safety nets, allowing FDI repatriation, and issuing long-duration bonds to fund social programs. Without this, high savings and depressed consumption will persist.
Key Data Points at a Glance
Indicator
Value / Metric
Significance
Signal
China 2026 GDP growth
4.6% forecast
New economy drives 96% of growth
✅ Positive
Real estate drag
~100bps in 2026
Down from 370bps peak in 2022; correction ~42% from 2017 peak
⚠️ Easing
Digitalization GDP contribution
2.8pp (~61% of growth)
Core digital ~10% of GDP; total digital ~45%
✅ Strong
Green transition contribution
1.6pp (~35% of growth)
Solar, EV, renewables increasingly prescient given Middle East tensions
✅ Strong
Household savings rate
32%
Abnormally high; reflects lack of healthcare and retirement confidence
🔴 Concern
AI trust (China vs. US)
87% vs. 32%
Edelman Trust Barometer; underpins grassroots AI adoption advantage
🔵 Notable
Manufacturing jobs at risk
90–100M by 2035
KKR's Investment Implications
Regime Change continues
Bigger deficits, stickier inflation, heightened geopolitics. Stocks and bonds increasingly correlated — traditional 60/40 under strain.
Asia as portfolio diversifier
Adding Asian private market exposure to a US-focused portfolio can improve return and dampen volatility. Private markets preferred over public indices.
Thematic investing essential
Key themes: Security of Everything, Energy Resiliency, Productivity & Retraining, Collateral-Based Cash Flows, Capital Light / corporate carve-outs.
PE opportunity in carve-outs
Multinational pullback amid deflation and restructuring creating deal flow. Sectors where China holds export dominance are the key profit focus.
A few threads worth highlighting beyond the data:
The report's central argument is that China's growth story has fundamentally changed character — it is no longer a story about property and manufacturing exports, but about digitalization and green transition. These two sectors alone account for nearly all of forecasted 2026 GDP growth, which KKR believes is broadly misunderstood by markets.
The most thought-provoking structural insight is the healthcare/consumption link. KKR draws a direct parallel to US history: American consumption-to-GDP rose almost entirely because of healthcare spending growth over six decades. China, with healthcare at just 5–7% of GDP and most of it paid out of pocket, has a population that rationally over-saves as a form of self-insurance. Fixing that — through social safety nets rather than consumption subsidies — is what KKR sees as the real unlock for the consumer story.
The labor market tension is the sharpest near-term risk. With 11–15 million university graduates entering the workforce annually but AI simultaneously eliminating entry-level white-collar hiring, and with automation threatening 90–100 million manufacturing jobs by 2035, the wage polarization (AI roles paying ~6x the urban average) could durably suppress middle-class consumption unless there is direct policy intervention.
"Brookfield's the largest infrastructure owner in the world... We drew a pipeline and we showed all the different components of the payments ecosystem on a pipeline and said it's like a pipe that moves any commodity except what it's moving…
Driven by automation, robotics, AI; services must grow 6%+ p.a. to absorb
🔴 Risk
University grads entering workforce
11–15M per year
vs. ~8–12M urban retirees annually; structural imbalance worsened by AI
⚠️ Watch
AI salary premium
RMB 60,738/mo vs. RMB 10,343 avg
~6x gap risks constraining middle-class consumption if unaddressed
⚠️ Watch
Rare earth control
52% mining, 91% refining, 94% magnet
Not easily replicated; major leverage in global trade negotiations
✅ Advantage
Auto export growth (2021–25)
55% CAGR
Batteries 33%, vessels 26%; capital goods dominance is structural, not cyclical
✅ Positive
China consumption / GDP
~40% vs. 65–70% (DM)
Healthcare at 5–7% GDP vs. 16–18% in US; key rebalancing lever
🔴 Gap
Foreign equity outflows (2026 YTD)
−$122.1B
Partially cushioned by $27.7B in domestic southbound buying
⚠️ Watch
Inbound tourism (2025)
35M arrivals
Up from 14M in 2023; visa easing driving recovery from Middle East/SEA