Asset Allocation

What is the endgame for US-China relations? What does this mean for Singapore investors?

April 27, 2025

So the FH Stock Watch went over the weekend, which shares my views on individual stocks.

3 points I wanted to discuss:

Sharing my updated probabilities on the macro outcomes
Where does value lie in this market?
Sharing my views on China after my recent trip

We discussed (1) and (2) yesterday, and we’ll discuss (3) today.

This is a modified FH Premium post written earlier this week.

I am making this available to all readers to keep you updated on my latest thinking given the current market volatility.

For my latest macro views, and what I am buying/selling, do consider subscribing for FH Premium.

You will also get access to my latest macro views, full stock / REIT watchlist, and personal portfolio (updated weekly).

What did I hear about China recently?

The views that were shared to me recently:

Some hold the view that China will relent on the tariffs eventually. Thought process is that a good chunk of China’s economy is export driven, and most factories pay their workers on a daily basis. So every day the factories are shut the workers don’t get paid, and the longer this goes on the greater the risk of unrest from business owners and workers.
China being China, domestic media is very controlled so you only hear pro-China/anti-US news in the media. But talk to the elites, and the view for China (and Xi) continues to be negative – they do not believe a turnaround for China is near, and they are still doing their best to move funds out of China where they can (as there is a fear that within a fear years this route may be shut completely).

Sharing my quick personal views on (1) – That China will relent on tariffs

At this point I do need to share my personal view that I disagree with (1).

I think that if China does this, they risk domestic unrest against Xi (because of the whole nationalistic sentiment about how the last time China gave it to foreigners like this during the Opium war, it led to a century of humiliation for China).

My personal view is that it is not wise to underestimate the nationalistic sentiment on this topic, and that China may be able to stomach a surprising amount of pain as part of this trade war, in the name of “standing up to foreign aggression / bullying” (arguably China may have a higher pain threshold than the US – where you can see in less than 1 month since the announcement of tariffs there is immense pressure on Trump to walk back the tariffs).

So I know what people are saying on (1), but I don’t agree (feel free to disagree with me).

Sharing my quick personal views on (2) – On whether to move capital out of China

And on (2), I actually am highly sympathetic to the view from the elites.

Truth be told if I were in a similar position as them I would also be doing my best to get my funds out of China.

Let’s put it this way, if you have the wealth and the means to move funds out of China.

Even if you assume a tiny 5% chance that something radical were to happen in China in the next 10 – 20 years, then it would make sense to move funds out.

Let’s put it this way.

As a wealthy elite, there are 2 options you have:

Stay in China and take the 5% chance that something big were to happen eventually (with unknown consequences for you and your family)
Move your funds out and take your chances elsewhere

If you have the means to do so, then (2) looks potentially very attractive.

So yes, I get why the elites think this way.

Whereas if you do not have the means to move wealth out, then the choice (or lack thereof) is simple.

And as an investor living in Singapore though, the calculus / risk-reward is fundamentally different.

Because in the 95% scenario where nothing goes wrong, my China investments could continue to perform and hold their value.

In the 5% scenario where things go wrong, the bulk of my assets (and me) continue to be safely in Singapore, and while the loss on my China investments will hurt, it is not the end of the world.

So there is a lot of nuance as to why it may make sense for foreign investors to continue investing in China even though the local elites are trying to move funds out, simply because of this different calculus.

What is China’s (and US’s) endgame?

Now what about the US / China endgame?

Let me cut to the chase.

Recent events have made the US and China endgame pretty clear.

US Endgame

The US end-game, is to isolate China from the rest of the world.

They want to split the world into China, and non-China (US allied).

This is obvious from actions such as their secondary tariffs, which promises lower tariffs if you trade less with China.

China Endgame

The China endgame on the other hand – is to simply avoid being isolated.

Some of the discussions from senior PRC leaders suggest that they have studied the Cold War well, and learned that a key lesson why the Soviet Union fell was because the US succeeded in isolating the Soviet Union from the rest of the world (Kissinger in particular was instrumental in this, with the opening up of US-China ties removing China as a key Soviet ally and accelerating the Soviet downfall).

Fast forward to today, and if the US succeeds in isolating China from the rest of the world, then they will win this conflict, as the world is too complex for any country to stand alone.

So the China goal is to avoid being isolated, and to ensure open relations with the world (ex US).

This is obvious from recent moves such as Xi going to Vietnam and Malaysia to build ties, and to stress the importance of the relationship between the countries.

China Endgame (Secondary)

In my view, China also has a secondary endgame – which is to position the RMB as an alternative to the USD as a reserve currency, for the world and especially for emerging markets.

Now what do you need to achieve reserve currency status?

You need:

Things you can spend the currency on – China being the factory of the world, this is not a problem
A stable currency

A lot of macro commentators talk about how a depreciation of the RMB is inevitable.

And yes, I do not deny that a RMB depreciation would solve a lot of problems for China given they are going through a deflationary deleveraging of the real estate sector.

But despite all the reasons in favour of why the RMB should be going weaker, the RMB has not weakened past 7.3 vs the USD.

My simple view (which could be wrong) – China is intentionally avoiding a further devaluation of the RMB, even at the cost of slower domestic growth, to position the RMB as a stable alternative to the USD.

Look at the performance of gold of late and it’s clear there’s a lot of investors looking for a place to park cash outside of the USD, and if the RMB attracts even a tiny fragment of that fund flow it could be a big win for China.

Follow Financial Horse to avoid missing any post!

Telegram Channel (or Telegram Group)
Facebook
Threads
Instagram
X (formerly Twitter)

Is the US still relevant?

There’s been quite active discussion in the private telegram group on whether the US can remain relevant in this brave new world.

My answer is without a doubt, 100%, yes.

I expand on my thought process below (snippets of this were shared in the private telegram group).

China will match (and surpass) the US in time to come. But as of today, the US is unmatched in terms of creativity and innovation. Just look at which country is spearheading the cutting edge of AI development

On top of that, the US for now, has the world largest and deepest capital markets, universities that continue to attract the world’s best and brightest, a system that can assimilate top talent from around the world, and is home to many of the world’s largest companies. No doubt in time many of this will change and China will narrow the gap, but the world as it is today? US continues to be the biggest boy in town.

China because of the sheer size of the population. They will surpass the US in terms of nominal GDP eventually. But GDP per capita is a fundamentally different story. LKY had a great comment many years back that for China to surpass the US in terms of GDP per capita requires sweeping reforms to the China system to solve inequality. I am not saying this is impossible, I am saying there is much to be done for China, and it is too early to write off the US.

The US system in my view is unmatched in fostering creativity and innovation, and attracting (and retaining) talent from around the world. In fact the recent bout of changes from Trump suggests that the American democratic system continues to be highly effective. In what other country in the world can the people vote in a new president, who virtually does a 180 from the previous administration, and enacts huge sweeping changes to rewrite the global world order in a bid to position the US for the next few decades of growth? You can fault Trump all you want, but it won’t be for lack of trying. Meanwhile look at EU politicians and systems, and you see how different things are.

How would this play out in this decade (and beyond)?

For what it’s worth, short of a direct US-China hot war (which I sincerely hope it does not come to play), I do not see a clear resolution of this conflict in the years ahead.

Neither the US nor China has the ability to take the other out completely (short of a direct hot war).

Both of them have huge domestic populations and supply chains, highly talented workforce, and both are investing furiously in remaining at the cutting edge of technological developments.

The US’s weakness is their large budget deficit and reliance on foreigners to buy their debt, and the lack of manufacturing capabilities (which can be exploited in a hot war), but that’s exactly that they’re trying to solve under Trump.

China’s weakness meanwhile is a lack of natural resources (which they are trying to solve by closer ties with Russia, Africa, Asia and the Middle East), a bursting real estate bubble, and large domestic inequality. Again, all of which they are trying to address as well.

I do not see either the US or China being able to take the other player out of the fight completely, which leads me to the conclusion that barring any big unexpected twist of events, the base case would be for both the US and China to remain highly relevant, and the world to coalesce around each of these 2 players. And to move from a unipolar pax americana, into a more multilateral world.