The main event this week wasn’t the much-anticipated US CPI report. It wasn’t the confirmation of a new Federal Reserve Chairman, and it wasn’t even the IPO of Cerebras Systems (which jumped 89% on its first day of trading). No, it was Donald Trump’s visit to Beijing for an even more anticipated meeting with Chinese President Xi. As much as the pomp and dancing kids were entertaining, it took me down memory lane.

Twenty years ago, I completed my last journey as a capital markets strategist across Asia. It was a whirlwind tour, covering 11 countries in 9 days. The trip concluded with yet another visit to China – one year after I had spent two weeks there touring manufacturing operations from Shanghai to Dalian. The 2006 visit took the team to the People’s Bank of China (PBOC), which is the country’s central bank. The mission was simple – to advise them as to the benefits of diversifying their reserve holdings away from a heavy concentration in US bonds to, well, Canadian government and corporate securities.

China’s president at that time was Hu Jintao and, one month before I arrived in Beijing, he had just wrapped up a tour of the US. That tour reinforced the vibe of integration and constructive partnership that was developing at the time. It included visits to Boeing and Microsoft (including dinner with Bill Gates), and a no-guarantee message that China’s “peaceful rise” could eventually see it become a consumer of US goods, while remaining a primary financier of US debt.

Back then, China was the world’s "linear growth" engine. It was simple: build it, export it, and buy U.S. Treasuries with the proceeds. Returning to that mental snapshot today, the contrast is jarring. The factory of the world has traded its low-cost labor for high-end automation, and that symbiotic relationship with the West has been replaced by a calculated, strategic rivalry. That was on display this week, as an apparent promise by China to buy 200 Boeing aircrafts (ironic for sure) was tempered by Xi’s warning to Trump that there would be consequences if the Taiwan file was mishandled.

We have been talking with clients about the impact of China’s emergence as a global economic and military superpower and how this should be reflected in our portfolio decisions. Since this is still an “emerging market” play, amplified by the fact that the country is governed by a centralized communist regime, the considerations we apply to decisions to invest there are different than deploying capital to developed markets. Yet, there are also common aspects that we need to pay attention to. That includes the economic fundamentals of the country, corporate performance, and fiscal and monetary policy. On that latter note, I think that Trump might be envious of the fact that monetary policy in China is not independent of the government’s desires.  

Let’s focus on the macroeconomic landscape. To say that China’s growth trajectory has been impressive would be an understatement. While the US economy still has the largest piece of the global GDP pie in nominal terms (just over 25% versus 17% for China), in price-adjusted terms China has overtaken the US. The above chart shows the shares of global GDP in purchasing-power-parity (PPP) terms, as estimated by the IMF. Ten years after my visit, China moved ahead of the US and now has close to a 20% share of global GDP versus about 15% for the US.

Still, this has become a study in contradictions for China. The headlines suggest a steady 5.0% Q1 growth, but as we always say, the devil is in the details (or in this case – composition). Yes, China is doubling down on "The New Three"—EVs, lithium-ion batteries, and solar power. They aren't just participating in the green transition; they are attempting to own the entire supply chain – something made easier since Trump arrived at the White House, with his climate change cancel culture in tow. This pivot to clean energy is critical to China since it faces problems on the domestic demand front.

When George W Bush spoke with Hu Jintou, he told him of the merits of building a consumer-led economy. Well, close to a third of China’s economy is now tied to the property sector and that segment is currently wearing a “zombie” label. Beijing is definitely trying to shift dead capital into tech, but you don't just rebalance away from a decade-long housing bubble without some serious scar tissue.

Fortunately for China, Trump decided that a war with Iran was a good thing to do in a mid-term election year. While the rest of the world navigates the complexities of Middle Eastern stability, Beijing is playing a much more pragmatic (and opportunistic) game. Where they were Iran's "buyer of last resort," China has now become a seller of last resort for countries in the Asian region watching their energy inventories deplete. More importantly, they are increasingly settling trades in China’s currency, the yuan, bypassing the dollar-denominated SWIFT system. It’s a quiet but effective way to capitalize on geopolitical chaos to build a parallel financial architecture.

So, where there are definitely cracks in China’s economy and we might normally shy away from this region as a place to put money, Ally and I believe this is where the rubber meets the road for our portfolios. It’s not just about GDP; it’s the sovereign balance sheet. China’s holdings of U.S. debt have plummeted to decade lows. When I was there in 2006, the PBOC held close to US$350 billion in US debt. At its peak just over ten years ago, this number was closer to US$1.3 trillion. Today, we are back to just over US$600 billion, as you can see in the above chart.  

Where is that money going? Into the vaults. The PBOC has been a relentless net buyer of gold for nearly two years straight. They aren't just hedging against inflation; they are building a "sanction-proof" reserve. Through this, the yuan is walking a tightrope—strong enough to prevent capital flight, but weak enough to keep those EV exports competitive. Meanwhile, Chinese equities are trading at a significant discount to US equities, even though the Shanghai Shenzhen CSI 300 composite outperformed the S&P500 from the time was I was last in Beijing to the end of 2021, as seen in the chart below. We believe the recent performance gap will close, either due to a pullback in US equities or a resumption of momentum in the Chinese market. We have overweighted Canadian stocks in the portfolio relative to the US since late 2024 and have also built out exposure to other regions, including emerging markets.

The China I saw 20 years ago was an emerging partner in a globalized world. The China we see today is evolving, but perhaps not in the manner we thought back then. It is learning from its own mistakes and those being made by its competitors. I have talked about this at length, but for all the hype over artificial intelligence (AI) as a productivity savior, this works more for economies that are less consumer dominant. I remember going to a club on my last visit where there were VIP tables that required a bottle of Chivas at each seat. It was packed, as was the laneway outside was with BMWs and Benz’s. As the economy grows, the middle-class transformation will continue, but the government sees a different approach than what the US has taken over the last fifty years or so. The investment opportunities still exist in the consumer sector and areas like wealth management and insurance, but the industrial and tech sectors are going to remain extremely important. For investors, this means that China is no longer a tailwind for global liquidity—it’s a competitor for it.

On behalf of the Pyle Wealth Advisory team, have a wonderful long weekend.     

Andrew Pyle