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When discussing the landscape of the Chinese stock market or the fundamentals of its economy, a chorus of domestic economists often emerges, ready with a surplus of pessimistic interpretations. They may cite the plunging property prices dampening consumer demand, the substantial risks associated with local government debt, and the massive layoffs at major tech firms that fuel concerns over fading innovation potential.

In summary, the narrative revolves around the idea that Chinese assets are currently undervalued and will become even cheaper in the future, whereas dollar-denominated assets are presently overpriced and will continue to escalate in value. Against this backdrop, the recent rally of the A-share market appeared to wither amidst a cacophony of doom and gloom warnings.

The pressing questions now include whether China can meet its 5% economic growth target and whether this target can ignite a bull market for A-shares. Additionally, what are the potential risk factors permeating the U.S. economy?

U.S. Debt Set to Reach $100 Trillion

Just last night, following the release of the latest economic data from the United States, the Federal Reserve’s observation tool indicated that the likelihood of a 25-basis-point rate cut in November has surged from 76% to 87%. The market is adjusting to projections of a looming recession.

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Contrarily, the yield on ten-year Treasury bonds has skyrocketed to 4.11%, while the yield on two-year Treasury bonds has dropped to 4.01%, resulting in an unusual inversion of the yield curve. This situation suggests that the Federal Reserve could halt further cuts in interest rates after a brief period of reductions. Typically, bond pricing tends to provide a more accurate reflection of underlying economic fundamentals.

 

Should U.S. Treasury yields rise sharply in the future, it will compel the Fed to raise interest rates to entice long-term investments in U.S. debt. The expansion of U.S. government debt from $426 billion in 1971 to approximately $36 trillion today is staggering, illustrating a debt growth factor of 82 times compared to a mere 26-fold growth in GDP during the same period. The widening gap between debt and GDP necessitates an increasing amount of debt to sustain artificial economic growth. Moreover, the debt-to-GDP ratio has escalated from 39% in 1971 to 122% today. If this trend persists, projections indicate that U.S. federal debt could reach a staggering $100 trillion by 2036.

 

This staggering amount of debt foreshadows heightened risks of inflation and default. To sell government bonds, the U.S. would have to offer higher interest rates to attract investors. However, holding high-yield bonds entails accepting greater risk.

Through a detailed analysis of these figures, it becomes apparent that investors in U.S. Treasuries may be operating under the belief that the U.S. economy is either already or will soon enter a state of stagflation. Presently, various data points appear contradictory, and asset prices are increasingly distorted. The paradox of U.S. Treasury yields rising despite anticipated rate cuts reflects bond market apprehensions regarding the creditworthiness of U.S. debt. At a more foundational level, it signifies a growing distrust in the sustainability of the dollar and the vast bubble that surrounds U.S. bonds.

Indeed, time may prove to be the ultimate dagger capable of piercing this bubble.

Now Cheap, Cheaper in the Future?

In 2023, China's automobile sales surged to a record-breaking 30 million units, demonstrating the robust purchasing power of its domestic market and providing significant momentum for the automotive industry. In stark contrast, the United States and European markets haven't returned to pre-pandemic levels of new car sales, with companies like Volkswagen planning to shut down their Brussels factory. It's hard to dismiss the implication that the overall contraction of the automotive market is linked to the prevailing high-interest macroeconomic environment.

Currently, China's manufacturing sector commands a formidable 40% of the global market, echoing the post-World War II levels of the United States. The sheer scale is such that if China were to halt operations for a week, it would lead to a substantial global economic paralysis.

This phase of economic growth has prompted some local economists to echo sentiments from Western Europe and the U.S., labeling the upgrade of China's industry as merely a manifestation of 'involution' or competitive pressure.

One common rhetoric surrounding China's successful overseas expansion in the automotive industry frames it as predatory pricing that negatively affects the free-market economies of the West.

 

The solar energy revolution, too, has seen China cornering a substantial share of the global market, yet it is often dismissed as a case of overproduction. Conversely, American stock markets continue to reward domestic companies disproportionately; for instance, Apple, despite a decade of little to no innovation, has managed to drive its stock prices to new heights, showing a stark divergence from its declining sales.

Microsoft's stock price surged in 2023 purely due to speculation surrounding OPEN AI, demonstrating a striking contrast to the fundamentals driving production and sales.

 

Despite China's evident manufacturing prowess, as evidenced by the fact that the number of industrial robots installed in China exceeds seven times that of the United States, even with a population four times larger, many economists remain entrenched in a pessimistic outlook regarding China's economy. This discord between reality and perception remains a perplexing phenomenon.

What Would Happen Without Wall Street?

If someone were to publish a book titled "How to Build a Billion-Dollar Hedge Fund without Investing Skills—Just Marketing," I would undoubtedly consider diving into it; there's wisdom to glean. According to the American narrative, China's ascent is poised to disrupt American business interests.

 

The emergence of the C919, China's domestically produced aircraft, has already led to a notable plunge in Boeing order volumes. China's expanding semiconductor industry has also compelled American chip manufacturers to offer significant discounts. Moreover, as Chinese automotive firms venture abroad, the once-bustling automotive hub in the United States has now become a ghost town.

Given this trajectory, what will the future hold for China's capital markets when they attain control over global asset pricing? Where would Wall Street find itself in such a scenario? Will it need to relocate to Hong Kong for sustenance from the Chinese government?

 

Currently, the financial markets and the supremacy of the dollar serve as the last bastion of American power. If this bastion crumbles, the world will witness the unvarnished reality of American hegemony.

For China, its industrial upgrades enhance its competitive edge, yet the accompanying balance sheet recession is gradually eroding the wealth of its populace.