Answering top questions on China

The US-China relationship has entered a familiar rhythm – high-profile summitry between the two, incremental deliverables to keep the relationship just somewhat stable, and unresolved structural tensions running just beneath the surface. Last week's meeting between President Trump and President Xi captured that dynamic well: a two-month truce extension, a handful of symbolic announcements, and a shared willingness to keep talking – with two more meetings planned over the coming year. Unfortunately, there was little substantive improvement on the issues that actually matter most to markets in the long-term, especially on technology and tariffs. The absence of escalation was itself the outcome, and that mutual leverage – US chip controls on one side, Chinese rare earths on the other – is sustaining a fragile equilibrium that could still tip over as dependencies decline over time.

Against this backdrop, China's own economic story is one of intensifying imbalances which remain vulnerable to pullbacks in AI and its relationship with the US. Exports and the AI supply chain remain bright spots, yet domestic activity across consumption, capex and housing continues to soften. Despite that, the renminbi is priced to strengthen to some of its strongest levels in over a decade, creating an interesting opportunity for investors. In this week’s Asia Strategy Focus, we address some of clients’ most asked questions on China, and look at potential investment opportunities in China’s currency and equities.

1) What are the main takeaways from the summit between President Trump and President Xi?

The summit was short on substance but long on symbolism – but the symbolism matters. No major breakthroughs were expected, and none materialized. The announced items were incremental and optics-focused rather than regime-changing: a two-month extension of the trade truce through 10 January 2027 (spanning the upcoming APEC and G20 leaders' meetings), released product lists for tariff reductions on $30 billion of non-sensitive goods, a Chinese commitment to import at least 10 million metric tons of US coal in 2027–28, and a new AI incident-communication hotline. The most market-relevant result was what did not happen: the summit acted as a circuit breaker against near-term escalation rather than a catalyst for optimism. This baseline predictability still matters especially compared to the risk of directional lurches in prior cycles. The leader-to-leader optics and rapport that has been built between them may not resolve structural conflict, but it can lower the probability of accidental escalation in the near-term. With both leaders signaling intent to meet again, it fosters a "keep talking" framework that anchors expectations.

2) What points of leverage does the US have, and what does China have?

The relationship is best understood as one of mutual vulnerability. US leverage is concentrated at the top of the technology stack – advanced semiconductors, manufacturing equipment, and export controls governing access to them. Tariffs remain a lever, but tech controls are more strategically binding because they constrain capabilities. China's leverage lies where it has scale, processing capacity and ecosystem depth – rare earths and magnets being the clearest example; reconstituting those supply chains takes years of capex and coordination – a significant challenge that the US is trying to tackle.

Crucially, this leverage is time-limited – China is racing to reduce its reliance on US chips while the US diversifies away from Chinese materials – so the mutual restraint that supports the current fragile equilibrium may erode as dependencies fall.

3) Can China exert pressure through the US Treasury market?

This is a recurring client question, and the honest answer is: not easily. Despite declines in the official SAFE holdings held with the Fed, China has been holding more Treasuries through international custodians such as Euroclear and Clearstream, making the overall decline in Treasury holdings relatively small. This also means China retains a large position in US Treasuries and can theoretically use it to exert pressure through selling those securities in the market. But two problems make it a poor weapon of choice. First, China runs the risk of self-inflicting loses because selling in size pushes yields up and prices down, marking down the very reserves China still holds in size. Second, there is a scale and absorption problem – sales large enough to move markets become disorderly and costly to execute, and it is not clear the medium-term impact would necessarily remain asymmetric against the US.