Seeing is Believing: Dispatches from China and Beyond

 

The Weekender is my bi-weekly take on macro shifts and emerging themes. It’s not investment advice — or even our firm’s official view. I aim simply to inform, challenge, and maybe entertain. If you’d like this in your inbox every other Saturday morning via Northern Trust, subscribe to The Weekender.

"A desk is a dangerous place from which to view the world," wrote John le Carré in The Honourable Schoolboy (1977).

It's especially so when combined with a spreadsheet and an unhealthy dose of bias. To overcome these dangers, I travelled to China last week to see things for myself.

As you may recall, my working thesis since What a Comeback (September 2024) has been that China's future is not in its past. China is attempting to transition from a debt-fuelled, property-centric growth model toward one where capital markets, consumption and technology play a much larger role — and where equities are no longer a sideshow, but a core transmission mechanism for wealth effects and capital formation.

What I found surprised me. Not only does this structural transition appear to be gaining ground, but it could be coinciding with a cyclical inflection — one that should be supportive for risk assets, which still look good value relative to domestic savings products and other international equity markets (supporting our tactical overweight to Emerging Market Equities, given China's significant weighting). What follows are my observations from meetings and conversations with some incredibly sharp — and very friendly — people. These are my own views.

"Not Selling"

Geopolitics and military adventurism were common topics, but my sense is that China's foreign policy is more shaped by domestic priorities — building a better tomorrow. That said, many seemed genuinely excited about the upcoming visit by President Trump, and read recent semiconductor and acquisition restrictions as pre-positioning. On Taiwan, I learnt that independence is one of many issues for Taiwanese voters, and can even rank lower than affordability, cost of living and economic opportunity — particularly for certain cohorts. That sounded quite familiar.

I sensed little urgency to sell U.S. dollar (USD) assets, given the return profile and deep liquidity that market offers. Renminbi (RMB) internationalisation remains an objective, but not a headline priority. Yes, yuan (CNY) usage in international trade will likely grow — but from a small base and with "orderly growth." And on the petro-dollar: Saudi Arabia still dominates that system, yet Saudi holdings of U.S. Treasurys are now less than those of Tether, a private stablecoin issuer that could actually help re-dollarise the system. USD reserve status looks safe. For now.

Demographics are Destiny

Unlike many Western countries, there is a high degree of trust in technology and artificial intelligence. As surveys cited by China Daily show, roughly 80% of Chinese consumers view AI positively, compared with only about one-third in the U.S. and major European economies. Technology development is broadly welcomed — and for good reason. It may be one of the only real antidotes to ageing demographics.

The day I arrived, Hong Kong ports announced they were deploying autonomous trucks — not only because the technology had advanced, but principally because there are no drivers. Most are near retirement age, and younger workers prefer digital work to shift work. Technology could not come soon enough.

Even youth unemployment looks different up close. China's official figures are widely accepted to understate labour slack — they don't fully capture the digital or gig economy, with influencers and short-form content producers common among young people. More interesting still: Some younger Chinese are choosing not to work — not out of despair, but because of demographics. Inheritance is now a real phenomenon as the first post-reform generation begins passing on wealth. Due to one-child policies, wealthy grandparents have only a very small number of heirs — though I suspect the State may soon address this via an inheritance tax, which came up in conversation. Spoiling grandchildren could become more common. It might explain why one 27-year-old personal assistant we met, who probably wasn’t earning much more than minimum wage, was driving a red Maserati to work.

China Speed

Driving in Beijing is perhaps the biggest downside — it takes an age to get anywhere. That said, it provided plenty of opportunity to pepper my colleagues with questions and reacquaint myself with car brands. BYD had just launched a production car capable of reaching 100 kph (60 mph) in under two seconds. Another prolific brand was Xiaomi — better known for smart gadgets, mobile phones and Internet of Things, which started producing cars only about two years ago. Xiaomi has gone from "we're making cars" to mass electric vehicle production, turning out one car every 76 seconds. Astonishing.

Another illustration of China Speed: Lightning, an autonomous humanoid, won the Beijing half-marathon in just over 50 minutes — seven minutes faster than the fastest human ever. It also obliterated the previous humanoid record of 2 hours 40 minutes in under a year.

Where will we be next year? Might humans doing dirty, dull or dangerous work become a thing of the past?

Higher Quality, Higher Multiples

Equity multiples have risen in China but remain reasonable at roughly 14x forward earnings for double-digit growth — especially as the quality of those earnings should improve. Technology, AI diffusion, robotics and digital infrastructure are being pushed to the forefront, with capital and policy increasingly aligned behind them. These sectors carry a much higher earnings quality and market-cap footprint than traditional drivers such as property and heavy industry. The fact industrial firm profits expanded 15.5% in Q1, suggests the pivot to higher-value-added exports is taking hold.

In my view, many external observers are still judging China through a legacy lens — aggregate financing, land sales, housing volumes — and in doing so risk missing a structural shift in where profits, productivity and growth are actually coming from. And if it's technology, it is perhaps noteworthy that China's Nasdaq Composite Index¹ equivalent — the ChiNext Index² — only recently closed above its previous record high set in 2015. A feat the Nasdaq achieved way back in 2014.

Structural Transition Meets Cyclical Inflection

A central policy focus has been stabilising nominal growth and engineering an exit from deflation — especially in the world's largest asset class: Chinese property. Measures span monetary easing, targeted fiscal expansion, inventory digestion and a renewed emphasis on completing unfinished projects. Authorities have also moved against chronic overcapacity through "anti-involution" measures, including tighter enforcement against below-cost pricing. The aim is not to re-inflate the old model, but to remove a significant headwind, restore pricing power, improve corporate profitability and break the deflationary psychology that has weighed on earnings and valuations for years.

Early signs suggest it's working. Housing appears to be bottoming. New and second-hand home prices in key urban cities have started rising sequentially (think second-derivative effects), transaction volumes in major cities are up, and commercial inventory is falling — coinciding with factory-gate prices turning positive for the first time in three years. Q1 GDP came in at 5%, up from 4.5% in Q4 and ahead of expectations. Moody's upgraded its outlook to "stable." Higher inflation, if sustained, could supports pricing power, improve corporate profitability and erode the real returns of fixed-rate savings products — making equities, with higher starting yields and better inflation credentials, more appealing.

A Rising Equity Culture

Capital-market reform reinforces this theme. Policies designed to channel long-term domestic savings into equities, encourage institutional participation, lift dividends and buybacks, and deploy state backstops all point the same direction: Equities are being promoted as the preferred outlet for national savings. With household deposits well above historical trends and valuations still reasonable by global standards, even modest reallocation flows could be meaningful for asset prices.

If trends persist, knowing the world's second-largest economy is exiting deflation — while the world's largest asset class is bottoming — could be the very catalyst that unlocks this substantial liquidity and drives further demand for Chinese equities.

Concentration : A Feature, Not a Bug

Turning to the U.S., while the next few months could be volatile — ongoing conflicts, a new Federal Reserve chair, U.S. election outcomes — there was general acceptance of our contention that tech concentration in the U.S. market is a feature, not a bug. Technology revolutions, like transport before them, have historically concentrated value and, in the case of transport, outperformed (see The Past is Prologue). The stocks that dominate today look more like sectors than single companies — vast conglomerates. And critically, unlike every bubble top where euphoric valuations are the norm, most Magnificent Seven³ stocks (ex-Tesla) have seen their multiples de-rated to only a modest ~15% market premium, despite delivering 100% higher EPS growth — with earnings estimates continuing to be upgraded.

 

Source: Northern Trust Asset Management, Macrobond, MSCI. Data from 12/31/2012 through 3/31/2026. Historical trends are not predictive of future results.

But They’re Overspending?

Compare AI capex to free cash flow, revenues or even GDP, and we remain well below 2000 levels. Most new capital expenditure is already matched by order backlogs that continue to explode. Demand is still compute-constrained (just ask Google), pricing power is genuine, and the customers are growing faster than any company in history. And we are still early in the adoption cycle. Large language models’ paying subscribers represent just 3% of US households — compare that to smartphone penetration (~90%) — and we have yet to see the full app proliferation or compute-intensive Agentic and Machine AI that lies ahead.

Oil – What If?

I'm no oil expert. But I am a Kiwi with a farming background, and I've seen many commodity fortunes made — and lost — through ignorance of some simple universal rules. The most important: Every asset has a life cycle, and the best cure for high prices is high prices. Rising prices attract supply, which eventually drives the price toward the lowest marginal cost. The exception is where supply is constrained by a rational actor — something conspicuously absent from New Zealand's Asian pear, kiwifruit, avocado, llama, angora goat and peony boom-busts. So what of oil, and Organization of the Petroleum Exporting Countries (OPEC) as its rational actor?

Consider this thought experiment. The UAE — arguably OPEC's largest spare-capacity holder — has demonstrated it will act independently. Could a lack of supply discipline, or even the threat of it, remove the scarcity premium embedded in the forward curve? What happens when the war ends and Gulf Cooperation Council (GCC) states move to recover lost revenues and market share? What of unsanctioned Iranian (and possibly Russian) barrels? What of production ramps from Venezuela, Argentina and Guyana? And what of the risk premium embedded in the Strait of Hormuz — which has been eroded from roughly 22 mbpd to estimates closer to 10 mbpd, as supply is re-routed via pipelines, rising U.S. liquefied natural gas exports, and as countries reframe decarbonisation from a moral or economic issue into one of national security?

When the war ends and new narratives emerge, could speculative length in oil reverse quickly? And if so, what might that do for inflation expectations, the Fed's reaction function — and for the persuasiveness of a new Fed chair who believes, "We're at the front end of a productivity boom. Economic growth won't be inflationary — we're in the early innings of a structural decline in prices."

I'm asking on behalf of homeowners everywhere. And for those who remember what happened the last time we cut rates into a tech-led, non-inflationary boom. (See the 1990’s for clues).

A Rising Tide

One reason I spend time on market liquidity is that I've possibly spent too much time with macro hedge fund managers over the years. These folks obsess over liquidity proxies, which correlate with — and quite possibly cause — improvements in risk appetite, asset pricing and activity. They will no doubt be excited to see U.S. M2 money supply hit all-time highs, with further bank deregulation to come. And they might also quietly rejoice that two of the most important jobs in finance — the Fed chair and the U.S. Treasury secretary — are occupied by two former macro managers who, no doubt, are familiar with the saying: A rising tide lifts all boats.

Debasement and Scarce, Sanction Free Assets

Many I encountered believe — as I do — that deficit spending, debasement and deglobalisation are here to stay, meaning constant demand for scarce, sanction-free assets: Gold. And Bitcoin. On the latter: The Clarity Act should pass this year, formalising jurisdictional boundaries. Institutional adoption has accelerated — Morgan Stanley Bitcoin ETF, UCITS⁴ funds now able to hold digital assets, US 401(k)s, UK Self-Invested Personal Pensions and Australian superannuation funds similarly empowered. The Harvard Endowment made Bitcoin its largest 13F public holding in Q3 2025 and added Ethereum ETFs in Q4 2025 — moves that, historically, others follow.

Perhaps most notable: Fannie Mae has accepted the first crypto-backed mortgage product. And Patrick Witt, executive director of the President's Council of Advisors for Digital Assets, has publicly stated that a "big announcement" on the Strategic Bitcoin Reserve is expected “in the coming weeks.”

The thread running through all of this — from Beijing to Bitcoin, from BYD to the Fed — is that the world is repricing. Structural shifts that were easy to dismiss from a desk are harder to ignore on the ground. China may not be the story the consensus tells. Technology concentration may not be the risk it is often framed as. Liquidity is rising, quality is improving and the assets best placed to benefit from a world of persistent deficits and deglobalisation are becoming clearer.

There will be volatility. There always is. But as le Carré reminds us — the bigger danger could be staying at the desk. The signal is out there if you're willing to go and find it.

As always, these are my own views. Until next time.

Have a great weekend.

Gary

 

Glossary

1. Nasdaq Composite Index - The market-cap-weighted index covers more than 3,000 U.S. stocks, with almost half the weighting in the technology industry.
2. China Index Academy - A leading property research institute in China that publishes housing price indices and market data across major cities, used to track trends in the real estate sector.
3. Magnificent Seven - The “Magnificent Seven” companies are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, which drove the sharp rise in U.S. stocks in 2023. 
4. UCTIS - European‑regulated investment funds operating under a harmonized EU framework, often viewed as the European equivalent of U.S. registered mutual funds, with strict standards for diversification, liquidity, and investor protection.