Newsletter commentary Apr 2025

Upholding Justice, Role Reversal, and a Protracted War

April Market Overview

In April, under the shockwave of the U.S. government's initiated tariff war, the market saw nearly 10% volatility, ultimately ending with most indices slightly down. Our portfolio also experienced significant fluctuations. Overall, we believe that the nature of this round of market upheaval differs fundamentally from previous episodes. Our economic standing has since evolved, and we now possess the leverage to engineer positive outcomes. That said, we anticipate this will be a drawn-out battle, requiring patience and strategic acumen to navigate through the uncertainties ahead.

Upholding Justice

The trade war instigated by the Trump administration caught the market off guard, and China's subsequent countermeasures, upon reflection, were entirely justified. Throughout his career, Trump has repeatedly achieved success through employing maximum pressure strategies, rendering his unorthodox maneuvers somewhat predictable. Nevertheless, in this particular instance, the administration miscalculated the geopolitical and economic landscape, significantly overestimating its bargaining power. The global economy of today bears little resemblance to that of a century ago; once one exhausts their arsenal of leverage, even the most aggressive pressure tactics prove ineffective.

Issues like the Israel-Palestine conflict, the Russia-Ukraine war, and the Dogecoin halving are all proving harder than Trump expected. He's miscalculated. In theory, buyers are stronger in negotiations—but only if the seller must sell. If the seller has the power to withhold, buyers are left in an awkward spot. Supply cutoffs are painful in today's economy. Under extreme circumstances, manufacturing capability reveals its true value. Rebuilding supply chains will take years.

The U.S. currently finds itself in an uncomfortable and constricted position, desperately pursuing unattainable goals in a short timeframe. It goes against both economic logic and principles of fairness. Previously, the U.S. could engage in bullying tactics without facing significant consequences, as global capital continued to pour into the country. This time, however, U.S. stocks, bonds, and the dollar are all falling simultaneously—an unprecedented scenario. In just a short time, the U.S. has damaged its hard-earned credibility. The U.S., the dollar, and Treasury bonds are no longer safe havens—even if the trade war eases, this loss of trust is hard to repair.

China's countermeasures have been rational. In contrast to the 2018 trade war, China has successfully transitioned from a strategic defensive posture to a position of strategic stalemate, and has even secured certain advantages and initiatives. As the world's pivotal trade hub, China's economic landscape is far-reaching, with the United States accounting for merely around 12% of its total trade volume. China not only serves as a major exporter but also acts as a crucial consumer for numerous nations, playing an indispensable role in global trade.

China's economy has long adapted to the trade war and has made ample preparations. Though no one wins in a trade war and it may dampen overall demand—especially as volatile tariffs pause business operations. At the end, it will accelerate China's economic transformation. Consumption and services will rise. Instead of flowing into U.S. Treasuries, the country's savings will engage in global investments, giving China more ownership in businesses worldwide. By actively participating in and shaping a new, open global economic order, China aims to ride the next wave of development, turning challenges posed by the trade war into opportunities for long-term, sustainable growth.

We are confident in China's economic future. This can be a moment to re-evaluate Chinese assets. At a macro level, this marks the end of U.S. monopoly and a reordering of global capital flows. China can offer the world the most stable economic environment. From an industrial perspective, the buyer-seller power dynamic is shifting. The dollar may lose credibility, while the yuan, backed by strong manufacturing, could gain trust. In the long run, our savings should be diversified globally, not concentrated in U.S. debt.

Role Reversal and a Protracted War

Typically, creditors hold the upper hand. But when a debtor can't repay in full, they gain some leverage in negotiations. If the debt becomes a sunk cost, and creditors write it off mentally, they may regain control—especially if the debtor still needs to borrow to sustain itself. The U.S. is in such a position. It may try to default, but its standard of living relies on foreign capital. If foreigners stop lending due to lost trust, the U.S. standard of living will have to drop. Defaulting may not be the optimal choice—it may have to offer assets in exchange.

Similarly, buyers often believe their purchasing power gives them leverage. But once it becomes clear that this buyer consumes on credit and might default, sellers will stop exchanging hard-earned goods for worthless IOUs. Ironically, the U.S. claim sellers benefit from this arrangement—which is absurd. In extreme scenarios, if those IOUs are worthless, sellers might as well give their goods to their own people and boost domestic consumption.

In normal times, manufacturing tends to be undervalued due to intense competition. R&D and marketing are seen as more glamorous, as shown by the "smile curve". But in crisis, manufacturing's value is redefined—it keeps you warm, and alive. If a product costs 10 yuan to make but sells for 100 yuan, the added GDP from the intermediary services—like legal, logistics, healthcare, education—are often illusory. Monopoly is the path to high profits in business and investment, but competition is what society needs to remain dynamic. Many "services" are just monopolistic cover-ups.

As for threats like delisting of Chinese ADRs, the U.S. used to be good at manufacturing bargaining chips out of thin air—a textbook case of bait-and-switch tactics. Trump's strategy is to take everything off the table at once, applying maximum pressure. But now it's not working. If you've already taken everything, the other party has no more to lose—resistance becomes their best option. For Trump, everything is transactional. He doesn't understand the value of reputation. He acts as if every deal is the last.

Delisting threats used to be major leverage. Now Chinese companies surprisingly say,'We're ready,go ahead.”The companies can be relisted in Hong Kong, or even return to A-share market. If this is now a financial war, which indicating that holding U.S. bonds isn't safe either. Why not exchange them for Chinese overseas stocks or other countries's currencies and equities? It's likely that the U.S. ends up hurting itself, undermining its own financial system.

The U.S. used to be a monopolist at the high end of the value chain—buyer, debtor, and creator of imaginary threats. It could do almost anything. But now the tide has turned. Once it realizes it has no cards left, it's already wasted its best plays and played them in the wrong order—throwing out all the bombs at the start.

This is a clash between giants, and it's just beginning. It will be a drawn-out war for both parties. Both have strong and comprehensive strength, and the outcome will determine the global order for decades. Neither side will back down quickly. It's also a process of educating the world and shifting global alignments.

There are multiple kinds of "spectators".Some are angry with the U.S. but afraid of its power; Some don't understand China and are cautious; Some see China as a competitor and want the U.S. to suppress it; Some support China but do a lot of business with the U.S.; Some have traditionally sided with the U.S. but are now confused by its erratic actions. Each has its own motivations and diplomatic calculations. In the end, it all comes down to interest and morality. The U.S. wants a world molded in its image, but can't offer others what they need. So there's little to negotiate. In contrast, China is now the champion of free trade and the multilateral system—this benefits developing countries and emerging markets the most. Full reciprocity in tariffs suppresses the sovereignty of developing nations. 

There will be no short-term winners in this trade war. Market volatility is expected, especially with Trump's erratic policymaking. But Chinese assets have a solid foundation. For the first time, China's financial markets are working in unison. What used to be tools of U.S. coercion can now be used by us offensively. For instance, U.S. threats over Chinese listings may backfire—Hong Kong is no longer a backup, but a vital capital market. Delisting threats are self-sabotage for the U.S. as well.

Trump's antics may ironically serve as a wake-up call to the world: the U.S. is no longer indispensable. And cutting ties with China is far more painful than expected. This may lead to a revaluation of Chinese assets. "As long as we stay on the right path, even through turbulence, we have nothing to fear.”This is the endgame. All we need to do is fasten our seatbelts through the bumps.