Who has the upper hand in financial markets, the US or China?

As Chinese President Xi Jinping arrives in Washington for a summit with US President Donald Trump, it becomes evident which nation has gained strength from the recent tariff shock. China's exports surged by 25% in annualized terms, boosting its trade surplus to $119 billion and setting the stage for surpassing the previous record of $1.2 trillion. Not only that, China's surplus with the US expanded by 44% to $29 billion, marking the largest gap since Trump's presidency.

However, in financial markets, the comparison between the US and China proves to be more complex. The US holds nearly two-thirds of the MSCI All-Country World Index's market capitalization, accounting for 40% of the global bond market, and possesses the world's most dominant reserve currency and most transparent capital markets.

Yet, these unprecedented times have shaken confidence in US Treasury bonds and the dollar due to President Trump's erratic decision-making. Notably, Norway's sovereign wealth fund reduced its government bond holdings, acknowledging the increased risk in US debt and the greenback.

Despite this, China's markets showcase resilience in several aspects. Chinese government bonds have defied the global sell-off in sovereign debt markets, with yields dropping to 1.6%, close to their all-time low. The country's interest rate differential with the rest of the world remains favorable, making renminbi funding increasingly attractive. Furthermore, China's persistent low inflation, coupled with accommodative monetary policy, has created a persistent interest rate advantage for renminbi funding.

China's yuan has strengthened to its strongest level against the dollar since January 2023, driven by the country's massive trade surplus and relative resilience against the energy shock. Additionally, China's competitive advantages in artificial intelligence (AI) provide a hedge against potential threats to the US AI infrastructure.

Bank of America highlights that China's AI ecosystem is less correlated with the US AI capital expenditure cycle, while JPMorgan believes Chinese internet stocks benefit from demand for AI monetization and application-layer exposure.

The sources of China's resilience in financial markets must be contextualized. The outperformance of bond markets is primarily due to the domestic economy's weak growth and expectations of further monetary easing. Meanwhile, the booming export-driven AI sector underscores the economy's imbalance. In contrast, the US Federal Reserve is raising interest rates due to the country's robust growth, with services and manufacturing output expanding at a five-year pace.

Nonetheless, China's strong financial market position offers a sense of stability amidst the US's market turbulence. When Xi last visited Washington in September 2015, China's markets were in turmoil. Today, however, China appears more resilient in the global financial landscape.