Commentary: The World May be Facing a Fundamental Turning Point in U.S.-China Asset Pricing

[para. 1] Following the Lunar New Year, global markets exhibited a clear shift in capital movement: a resurgence in Chinese equities, weakening U.S. stocks, a strengthening of Treasury bonds, and a declining dollar. This shift fueled discussions about the financial trend of “East rising, West declining.” [para. 2] Although last week these trends somewhat stabilized, with Chinese stocks maintaining their upward trajectory and U.S. stocks showing signs of stabilization, questions arose concerning a potential fundamental shift in the China-U.S. macroeconomic narrative and whether we are witnessing a major turning point in global asset pricing. [para. 3] Understanding these dynamics involves examining what has influenced asset pricing in both economies recently.

[para. 4] China's economic outlook for 2024 has been characterized by weak domestic demand, highlighted by a significant contraction in local government investment and household credit. This has adversely impacted corporate profits and financial conditions, leading to a preference for safe-haven assets. [para. 5] In contrast, the U.S. narrative has been driven by an AI-driven technological revolution, enabling U.S. equities to reach record highs despite global demand weaknesses, thus reinforcing a “U.S. dominance” story in global capital allocation. [para. 6] This divergence has been influential since the “Sahm Rule” shock in August 2024, which reinforced a belief in strong U.S. assets and a strong dollar, a trend magnified by Trump’s 2024 reelection.

[para. 7] Early 2025, however, saw significant changes with the “DeepSeek shock” affecting these expectations. [para. 8] China’s real estate showed resilience while its central bank tightened liquidity post-Lunar New Year, affecting bond yields. [para. 9] In the U.S., the narrative of American exceptionalism was contested by DeepSeek's rise, leading to declining U.S. stocks and concerns about a recession.

[para. 10] Throughout the past month, recalibrations of expectations suggested a potential gradual recovery for China and a diminishing view of U.S. exceptionalism. [para. 11] By 2023, markets had seen extremes in asset price movements, reflecting a rare post-pandemic structural transformation.

[para. 12] For 2025, adjustments in Nasdaq, Chinese bonds, U.S. Treasuries, and the dollar have questioned if we’re at a true inflection point in asset pricing. Four factors are crucial for evaluation: China’s domestic demand, the U.S. economic cycle, dollar flows, and global manufacturing cycles. [para. 13] Since 2022, AI advancements have driven the U.S. cycle, while real estate has been central to China’s cycle, shaping fiscal and financial policies.

[para. 14] The divergence between China and the U.S. has also impacted dollar flows and manufacturing dynamics, indicating an inevitable major inflection point. [para. 15] China’s real estate reform is key for its asset turnover, while the U.S. asset cycle is driven by technological shifts, suggesting eventual recalibration of capital flows.

[para. 16] DeepSeek has intensified U.S.-China tech competition, particularly in AI development. [para. 17] Trump’s tariff policies in his second term are expected to reshape not just China-U.S. trade but also global supply chains post-pandemic.

[para. 18] As of now, there isn’t enough evidence for a decisive rebound in China’s property sector. [para. 19] While DeepSeek challenges U.S. AI dominance, the completion and application of AI development loom on the horizon. [para. 20] Over time, as AI evolves from R&D to mass application, productive adjustments in asset pricing are expected globally.

[para. 21] By 2025, China aims to decouple from its real estate dependency, with AI applications being key to future asset transformations. [para. 22] In the short term, 2025 is marked by volatility and fluctuating market dynamics due to evolving AI, China’s stabilization efforts, and U.S. policy shifts. [para. 23] Zhou Junzhi, a macro analyst at Citic Securities, with a Ph.D. in Economics from Zhejiang University, provides insights into these developments.