The U.S. Ascendant: Capitalizing on China’s Economic Decline

The global economic order is shifting dramatically, with China’s once-dominant growth engine crumbling under systemic flaws and policy missteps. Far from being a distant concern, this decline is set to reinforce the United States’ financial supremacy as capital flees uncertainty for the safety of U.S. assets. Hedge fund manager Kyle Bass, renowned for his macroeconomic foresight, has warned, “We are witnessing the largest macroeconomic imbalances the world has ever seen, and they are all coming to a head in China.” This article explores how China’s economic unraveling—driven by a collapsing real estate sector, deflationary pressures, and capital flight—will bolster U.S. dominance, particularly through the dollar and Treasury markets, while presenting both opportunities and challenges for American investors.

China’s Economic Collapse: A House of Cards

China’s economic troubles are stark and measurable. The real estate sector, accounting for roughly 30% of GDP, lies at the crisis’s core. Decades of overbuilding, fueled by speculative credit, have left an estimated 60 to 70 million vacant homes—what Bass calls “a Ponzi scheme that is finally collapsing.” The implosion of developers like Evergrande and Country Garden since 2021 has triggered a liquidity crisis, with property sales plummeting and home prices falling across major cities. This collapse erodes the collateral underpinning China’s shadow banking system, deepening financial instability.

Deflationary pressures are intensifying the crisis. Consumer prices have fallen for four consecutive months, and industrial profits dropped 9.1% year-over-year in 2024. The People’s Bank of China faces constraints in easing monetary policy due to a weakening renminbi and strained bank profitability, limiting its ability to counter deflation. Bass describes this as “a slow-motion banking crisis,” with capital fleeing at an unprecedented pace. In 2024, net foreign direct investment in China fell by $168 billion, the largest drop in over three decades. This capital flight is reshaping global markets, with significant implications for the U.S.

The U.S. Dollar and Treasuries: The Global Safe Haven

As China’s economy falters, global capital is rushing to the U.S., reinforcing its position as the world’s financial anchor. The U.S. dollar remains the dominant reserve currency, accounting for 88% of global foreign exchange transactions. Its strength stems from the lack of viable alternatives, the U.S.’s robust economy, and its unmatched financial infrastructure. This flight to safety is driving demand for U.S. Treasuries, the world’s deepest and most liquid sovereign debt market. Increased demand pushes bond prices up and yields down, even as the U.S. runs a projected $1.9 trillion fiscal deficit in 2025.

Yield differentials further amplify this trend. The U.S. 10-year Treasury yield stands at 4.26%, compared to China’s 1.64% for its 10-year sovereign bond, making U.S. assets far more attractive. While the European Central Bank has cut rates aggressively, the U.S. Federal Reserve’s higher rates draw capital inflows, strengthening the dollar. This pattern mirrors past crises, like the 2008 Global Financial Crisis and the 2020 pandemic, when the dollar rallied as investors sought stability. As analyst Anne Stevenson-Yang notes, “Capital doesn’t care about ideology—it cares about trust, liquidity, and rule of law.”

Opportunities for U.S. Dominance

China’s decline offers the U.S. a chance to solidify its economic leadership. Capital inflows are likely to boost U.S. asset prices, particularly Treasuries and dollar-denominated assets. With a GDP per capita of $89,680 compared to China’s $13,870, the U.S. remains a beacon of stability and growth. This disparity drives investor confidence, positioning the U.S. as the “cleanest shirt in a very dirty laundry pile.”

The shift toward “friendshoring” is another boon. Trade is increasingly favoring geopolitically aligned nations, with a 6% rise in trade among “close” countries and a 4% drop with nations like China in 2023. U.S. tariffs on Chinese imports are accelerating the relocation of supply chains to North America, boosting domestic manufacturing. Estimates suggest that a 30% tariff increase could reduce China’s GDP growth by 1.5 percentage points while lifting U.S. growth through redirected trade and investment.

The U.S. also holds a technological edge. Outspending China on R&D as a percentage of GDP, America leads in fields like artificial intelligence and space exploration. This innovation, combined with robust capital markets, attracts investment in high-growth sectors, further entrenching U.S. dominance.

Challenges Amid Opportunity

China’s decline poses risks for the U.S. economy. For decades, U.S. corporations benefited from China’s cheap labor and growing middle class, exporting inflation and importing deflation. As China’s demand for U.S. exports—its third-largest market—wanes, multinationals face earnings pressure. In 2024, China’s exports to the U.S. fell 35% year-over-year, signaling a sharp trade decline.

Moreover, China’s deflation could export disinflation to the U.S., complicating Federal Reserve policy. Bass warns of “a permanent shift toward zero or negative real growth” in China, with actual GDP growth estimated at 2.4%–2.8% in 2024, far below official claims. This could lower U.S. nominal GDP growth, especially in trade-exposed sectors, as markets adjust to reduced global growth expectations.

Navigating the New Global Order

China’s economic demise is a catalyst for a reordering of global leadership. The U.S., with its resilient economy and trusted institutions, is poised to capitalize on this shift. Investors should prioritize capital preservation, with U.S. Treasuries offering unmatched safety. As Bass notes, “China’s economy is spiraling with no end in sight,” but for the U.S., this spiral could herald a new era of dominance. By leveraging its financial and technological strengths, the U.S. can not only weather China’s downturn but emerge as the world’s economic anchor for decades to come.

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