A year of snakes and ladders
As China celebrates the Lunar Year of the Snake, the first angpao (red packet gift) was the DeepSeek artificial intelligence (AI) software that shook Wall Street to the tune of nearly $1 trillion in market capitalization. This reminded me of the classic game called Snakes and Ladders, whereby players roll the dice to go up in ladders and slide down via snakes. The element of chance (dice-rolling) and its multiplayer form reflects the specter of widening volatility whereby United States President Donald Trump gives daily stunning executive orders amidst huge uncertainty from natural disasters to game-changers like DeepSeek on the whole AI tech wealth generation game.
How do we figure out who and what is up and down in this snaky slippery year? Reflecting on this during the Chinese New Year holidays, the best analysis I have heard was from the Hong Kong-based insightful Louis-Vincent Gave, who argued that the mainstream media has overlooked the fact that the Chinese economy has leapfrogged the West in engineering and increasingly in technology.
After eight visits to the mainland last year, I arrived at the same conclusion—most of us overlooked the qualitative change in the mainland economy because few outside “experts” visited the factories and looked at what is really going on. The macro statistics that outsiders examine in excruciating detail suggested that the Chinese economy is in deep trouble, whereas what we are witnessing is a qualitative change in supply (production) and demand (consumption or investment) which Louis-Vincent identified brilliantly. A structural and cyclical change has happened in China largely within a world distracted by the Ukraine and Gaza wars and the domestic political turmoil in the West.
We need to see these nuanced changes within the context of a world being transformed by technology (especially social media) and the discrediting of mainstream Western media churned out by liberal elites who have lost touch with reality and the masses. Wall Street reads the economic tea leaves that show a booming US economy, but underplays the fact that the boom in both stock market and employment was stimulated by unsustainable fiscal and trade deficits.
As China is portrayed as the US existential threat, you would have thought that China gained the lion share of global surpluses at the expense of the US’ rising external debt. Unfortunately, the facts show otherwise. China’s net international investment position (NIIP) grew by $0.9 trillion from $2.0 trillion or 18.5 percent of GDP in 2016 to $2.9 trillion or 16.6 percent of GDP by the end of 2023, small compared to the $11.6 trillion in US NIIP growth during the same period.
What is truly intriguing was that between 2016-2023, the cumulative Chinese current account balance was $1.8 trillion, whilst foreign exchange reserves increased by only $272 billion during the same period. In short, there were unexplained outflows of roughly $1.5 trillion, which I interpret as “footloose Chinese capital,” comprising mostly Chinese private sector money accumulated offshore through various means not captured by official data.
Some of this money can be crudely monitored through the increases in NIIP of the international financial centers of Hong Kong (+$631 billion), Singapore (+$141 billion) or United Arab Emirates (+$707 billion). But it does not preclude that footloose Chinese money could be invested directly in the US stock market. After all, rich Chinese love US dollars as much as any other capitalist. The point is that Chinese money is not simply money controlled by the Chinese state, but also private money that has become a significant player in global capital markets.
It is the fear of both internal and external sanctions that is driving Chinese capital “footloose.” But where such funds are allocated depend on prospects of future returns and risk considerations. If the US market is overvalued by some metrics, whereas the West is underrating the Chinese stock market, it is small wonder that events like DeepSeek could spark a simple short US-long China tech play.
Something similar is happening in Japan. Japanese monetary policy is beginning to normalize as Japanese inflation is returning due to an excessively cheap yen.
Japan is the largest NIIP surplus country in the world, with $3.3 trillion surplus at end 2023 or 79.5 percent of GDP. Because of the weak Yen, Japanese GDP in USD terms fell from $5 trillion in 2016 to $4.2 trillion at the end of 2023.
What are the signs of market moves? The biggest recent sellers of US Treasuries between November 2023-November 2024 were Japan (-$28.7 billion) and Mainland China (-$13.4 billion). Global footloose money is getting nervous that the recent spike in 30-year US Treasuries yields to nearly 5 percent per annum may be signs that US stocks and bonds are at risk to geopolitical or random events.
This does not mean that Trump’s bullish outlook on the US economy may not play out. We are after all in a game of real Snakes and Ladders. You climb up slowly but can slide down quickly. Asia News Network
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Andrew Sheng is former chair of the Hong Kong Securities and Futures Commission.
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The Philippine Daily Inquirer is a member of the Asia News Network, an alliance of 22 media titles in the region.
