The New Chinese Cycle: Reflation in a World of Retrenchment

The World's two biggest economies are going on diverging growth paths. While the US would welcome an economic slowdown to bring yields down and create demand for treasuries, China cannot tolerate a large global slowdown as it would exacerbate its debt deflation issues and destabilize the financial system, making growth preservation a strategic imperative.

China is actively working to reflate the economy, notably via increased government spending, household transfers, and substantial liquidity injections. Recent pro-growth speeches by Xi Jinping, along with the stronger-than-expected 5.4% GDP growth in Q1, underscore the regime’s commitment to this new cycle (although tariffs front-loading likely helped).

More importantly, China is shifting from supply-side to demand-side economics, pivoting from industrial overcapacity (infrastructure stimulus) to demand-driven growth by supporting household income and private sector balance sheets (consumption recovery). This could allow the eastern giant to meet its growth target despite an anticipated slowdown in exports.

Why investing now? Given the latest tariffs escalation and the threat it poses to the economy, Chinese authorities are expected to ramp up the announcement of more fiscal and monetary stimulus. The better macroeconomic backdrop compared to the US could drive capital rotation toward Chinese equities and assets tied to liquidity expansion.