Commentary: The World May be Facing a Fundamental Turning Point in U.S.-China Asset Pricing
By Zhou Junzhi
After the Lunar New Year, global markets experienced a noticeable shift in capital flows. Chinese equities rebounded, U.S. stock weakened, Treasury bonds strengthened and the dollar declined. The shift rekindled the narrative of “East rising, West declining” in market discussions.
Last week, these trends started to ease — Chinese stocks continued their cyclical upward momentum, while U.S. stocks showed signs of stabilization. This volatility raised the question: Is there a fundamental shift in the macroeconomic narrative of China-U.S. assets? Are we witnessing a major turning point in global asset pricing?
Before addressing these questions, we must clarify what has been driving asset pricing in both economies over the past month.
The core theme of China’s 2024 economic outlook has been weak domestic demand, evident in a sharp 3.7 trillion yuan ($512 billion) contraction in local government investment and a 1.55 trillion yuan decline in household credit. This contraction has put pressure on corporate profits and financial conditions, leading to weaker risk assets and a stronger demand for safe-haven assets.
Conversely, the dominant narrative for U.S. assets in 2024 has been the AI-driven technological revolution. This theme has allowed U.S. assets to defy the weaknesses in global demand, pushing U.S. equities to record highs. Global capital has increasingly priced in a “U.S. dominance” story, further widening the gap between U.S. and non-U.S. assets.
This divergence in China-U.S. narratives has persisted for over a year, shaping 2024’s dominant pricing patterns. The “Sahm Rule” shock in August — when the rise in American unemployment triggered the recession indicator — reinforced this view, and since Donald Trump’s presidential victory in the November election, markets have focused on a “strong dollar and U.S. stocks” trade, driving capital flows into the United States and exacerbating asset disparities.
However, the early 2025 “DeepSeek shock” has begun to unravel these expectations.
Meanwhile, China’s first-tier and strong second-tier cities showed unexpected resilience in property sales. While markets remain cautious about a fundamental rebound, they have started pricing in a slower rate of decline. At the same time, China’s central bank tightened liquidity and stopped government bond purchases, triggering a correction in bond trades after the Lunar New Year. As a result, bond yields saw a sharp adjustment.
American assets also experienced a narrative reversal after the holiday. DeepSeek challenged the foundation of U.S. “exceptionalism” — the belief that America had a monopoly on AI-driven technology. By January 20, the “Trump trade” moved from speculation to reality, with the president rolling out new tariffs and fiscal spending cuts, lacking clear policy transparency. Weak economic and employment data further fueled recession concerns. U.S. stocks declined for four consecutive weeks, Treasury yields fell below 4.3%, and the U.S. dollar index retreated to pre-Trump trade levels.
Over the past month, the market has effectively recalibrated two prevailing expectations: China’s economy is capable of recovery, albeit gradual, and the U.S. economy is no longer an unquestioned exception.
Global Asset Pricing Reset
Since 2023, markets have witnessed extreme asset price movements — record highs in gold and the Nasdaq index, 20-year lows in Chinese bond yields, and near 20-year highs in U.S. Treasury yields and the dollar index.
These trends suggest that the post-pandemic world is undergoing a rare structural transformation that cannot be fully explained by short-term cycles.
In 2025, the Nasdaq, Chinese bonds, U.S. Treasuries and the dollar have all started to adjust their trajectories. This raises the question: Have we reached a true inflection point in global asset pricing?
To assess this, we must analyze four factors: China’s domestic demand, the U.S. economic cycle, dollar capital flows and the global manufacturing cycle.
Since 2022, China and America have followed distinct long-term trajectories. The U.S. cycle is primarily driven by AI-led technological advancements, acting as a catalyst for a new global economic era. Meanwhile, real estate remains the pivotal factor in China’s long-term cycle, influencing fiscal policies and the financial system. Unlike in the past, domestic demand policies and stimulus mechanisms are now closely tied to structural shifts in the property sector.
These diverging trends in China and the U.S. have also shaped global dollar flows and manufacturing dynamics. A major inflection point for China-U.S. assets is inevitable. China will eventually overcome the drag of its traditional real estate model on domestic demand, while the U.S. will inevitably move beyond the early-stage monopoly of AI-driven economic gains.
China’s asset turnaround hinges on real estate reform. The key lies in setting interest rates at sustainable levels. The market consensus is clear that China’s old financial-property model must end, but there is debate over how to change — should China avoid a Japan-style low-rate stagnation, or can it chart a unique demand-driven recovery path?
The U.S. asset inflection will be driven by technological shifts. The U.S. economic cycle is shaped by technology, credit and fiscal policies. History shows that technological revolutions are the most fundamental driver of U.S. economic and asset cycles. As AI moves beyond R&D into widespread application, America’s “exceptionalism” narrative will fade, leading to a reversal in dollar capital flows.
DeepSeek has intensified U.S.-China tech competition. Historically, the U.S. has dominated the early R&D phase of every technological revolution. However, the rise of DeepSeek in 2025 marks a significant shift — China is now challenging the U.S. in the first phase of AI development. As China and the U.S. intensify their AI competition, China will increasingly benefit from the early R&D dividend.
Trump’s second-term tariff policies will reshape global manufacturing. This is no longer just a China-U.S. trade conflict but a broader restructuring of post-pandemic global supply chains. The scope, tariff rates and mechanisms used may surpass those of 2018.
China-U.S. Asset Outlook
Currently, there is insufficient evidence to confirm a decisive rebound in China’s property sector. For a true turning point, interest rates must be adjusted to levels that support real estate’s move from a financial asset to a consumer-driven market. Investors must be patient.
DeepSeek has disrupted America’s AI dominance, but AI has yet to move into widespread application. Historically, the U.S. retains a competitive edge in R&D, suggesting that the early 2025 pricing of a U.S. asset downturn may be premature.
Over the long term, China’s economic structure will inevitably shift away from real estate dependency, and the sector’s impact on growth will diminish. Similarly, the U.S. will not retain its absolute leadership in AI indefinitely. Once AI moves from R&D to full-scale application, global productivity will benefit, leading to a fundamental reset in asset pricing.
As 2025 unfolds, China is approaching its “great reset” moment. AI will expand from the U.S. to the rest of the world, transitioning from R&D to large-scale adoption. When China fully detaches from real estate constraints and embraces AI applications, its assets could undergo a profound transformation.
In the near term, 2025 remains a prelude to major change, marked by high volatility. Key themes to watch include the evolving AI landscape, China’s search for economic stabilization and policy shifts in the U.S. With Trump’s tariff and fiscal policies unfolding, uncertainty will persist, making volatility the defining feature of global assets in 2025.
Zhou Junzhi holds a Ph.D. in Economics from Zhejiang University and currently serves as the Chief Macro Analyst at Citic Securities.
Contact editor Denise Jia (huijuanjia@caixin.com)
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