Who has the upper hand in financial markets, the US or China?
As Chinese President Xi Jinping arrives in Washington for his much-anticipated summit with US President Donald Trump, it is clear which country emerged stronger from the tariff shock. Last month, China’s exports rose 25 per cent in annualised terms, causing the country’s trade surplus to swell to US$119 billion and putting it on track to exceed last year’s record of US$1.2 trillion. Moreover,…
President Xi Jinping's visit to Washington for a summit with US President Donald Trump highlights China's stronger position in financial markets following the tariff shock. China's exports have grown by 25% annually, with trade surplus exceeding $119 billion, and with the US, it has widened to $29 billion - the highest since Trump's presidency. China's use of rare earths as a weapon against global markets further underscores its power.
However, financial markets comparisons between the US and China are complex. The US holds almost two-thirds of the market capitalisation of the MSCI All-Country World Index and 40% of the global bond market. The dollar is the world's reserve currency, and US capital markets are deep, liquid, and transparent.
Recent events have shaken confidence in US Treasury bonds and the dollar. The US debt and greenback are now "risky assets," according to Deutsche Bank's George Saravelos. Meanwhile, China's government bonds have outperformed global sovereign debt markets. US 10-year yields reached 5%, the highest since 2007, while China's 10-year yield dropped to 1.6%, slightly above its all-time low. This makes Chinese government debt more attractive, growing almost 3% this year.
Moreover, China's yuan has risen to its strongest level against the dollar since January 2023, despite domestic economic challenges and the greenback's rally. China's massive trade surplus, combined with its resilience to energy shocks, supports a stronger yuan. This gives China an advantage in AI, which is less correlated to the US AI capital expenditure cycle, according to Bank of America. China's internet stocks also benefit from demand for "AI monetisation and application-layer exposure."
However, China's market resilience is tied to its economy's vulnerabilities. Retail sales growth has not exceeded 1% for five consecutive months, and China's export-driven AI boom reveals the economy's imbalance. Despite these challenges, China's stable debt market provides comfort amid the US financial market instability. The last state visit between Xi and Trump in September 2015 saw China's markets in turmoil, a stark contrast to today's stability.
Written by urgent.news from Reuters Business via SCMP's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
