The escalating economic and geopolitical confrontation between the US and China in 2025 reflects a deeper clash of strategic resolve and systemic resilience. Trump’s renewed tariff campaign against the entire world, framed as a strategy to bring home manufacturing jobs, triggered volatility across financial markets, exposed the fragility of the US dollar-based economic system, and reignited fears of inflation and capital flight.
China, rejecting too-little-too-late diplomatic overtures and retaliating with reciprocal tariffs of its own, has positioned itself as a disciplined counterweight, confident in its centralised capacity to sustain the absorption of economic pain and bolstered by the rapid deployment of transformative technologies like DeepSeek.
As both powers confront mounting internal pressures, the standoff increasingly hinges on which society can endure more hardship for a longer period without political rupture. In this titanic clash of resolve, the stakes have surged, setting the stage for a world reshaped along deep strategic fault lines, mirroring a two-sun solar system.
See also: Mayday or May Day?
Unlike other countries that tried to plead for their cases by flying to Washington, China retaliated, going toe-to-toe with Trump’s tariff increases, “mano a mano”.
The extensive near-global “reciprocal tariffs” resulted in a spike in the yields of the 10-year US Treasury bills, a stock market crash, a fall in the US dollar, and lower oil prices, signifying a fear of falling global growth. Indices reflecting financial markets’ volatility all rose substantially in response.
Efforts to reduce the US current account deficit through tariffs and other protectionist measures risk destabilising global capital flows, unsettling asset markets, and exposing vulnerabilities within an increasingly hyper-financialised world economy.
See also: 100 days of populism
The US current and capital accounts are inherently linked — by definition, the current account plus the capital account must sum to zero. Thus, any reduction in the current account deficit, whether by curbing imports or boosting exports, would necessarily entail a decline in capital inflows unless offset by other mechanisms.
In today’s financialised global economy — where financial assets such as stocks, bonds, and derivatives are five to ten times larger than global GDP, and cross-border capital flows far outpace trade flows — even a modest disruption in capital inflows could provoke outsized reactions in asset prices, which are acutely sensitive to interest rates, capital mobility, and investor confidence. Talk of America forcing its allies, especially those reliant on its security umbrella, to swap their treasury holdings for “Century Bonds” frightened its allies.
If tariff-driven uncertainty or the weaponisation of finance erodes confidence in US macroeconomic management, the dollar’s safe-haven status could weaken, accelerating diversification into alternatives like gold, euro-denominated assets, the Chinese yuan, and commodities. These dynamics risk creating policy error loops.
While Trump’s agenda is rooted in the belief that the US has been “cheated” on trade, his measures could inadvertently trigger capital flight, expose the fragilities of the dollar-based financial system, and spark the very crisis he seeks to avert — namely, the erosion of industrial strength through a financial market collapse.
Recent market behaviour underscores these risks: typically, crises see a “flight to safety” into US dollars and US Treasuries, but following a 19% stock market decline since its February 19th peak, the dollar has instead fallen by 4.5%, and treasury yields have risen, contrary to historical norms. Treasury yields, which usually drop during periods of fear, have increased by 0.25% since early April, signalling underlying stress.
Even Trump himself acknowledged growing financial market unease shortly before pausing his latest round of tariffs. Fiscal vulnerabilities compound these risks, with the US running a US$2 trillion annual budget deficit — around 7% of its GDP — even as foreigners hold about US$7 trillion in treasury bonds, or a third of publicly held US debt.
Sustained foreign demand for treasuries is crucial: JPMorgan estimates that a mere US$300 billion decline in foreign holdings could raise yields by 0.33 percentage point. Meanwhile, concerns persist that China, if sufficiently provoked, could retaliate by reducing its treasury holdings, although such a move would likely be a last resort. Recent events also challenge the long-standing assumption that the greenback’s reserve currency status immunises it from fiscal-market revolts.
For more stories about where money flows, click here for Capital Section
The UK’s 2022 political and economic “mini-budget” crisis, triggered by then-Prime Minister Liz Truss’s ill-conceived tax plan that resulted in spiking yields and her resignation, serves as a cautionary tale. Developments over the past few weeks suggest that even the US is not immune to a crippling market backlash when policymakers behave erratically and irresponsibly.
Trade war: Denting US consumer confidence, stoking inflation fears
The US consumer sentiment index declined precipitously from 57 in March 2025 to 50.8 in April, reflecting a broad and deepening sense of pessimism across the population. This figure represents the second-lowest reading in the index’s recorded history, only marginally above the all-time low of 50 reached in June 2022, when inflation surged amid Covid-related supply chain disruptions.
The deterioration in sentiment was both bipartisan and widespread, with significant declines observed among Democrats, Republicans, and independents. Sentiment among independents fell to a record low, while Republicans recorded their weakest outlook since late 2020, during the fraught presidential transition from Trump to Joe Biden. Inflation expectations have worsened markedly: consumers now anticipate a 6.7% rise in prices over the next year — the highest one-year inflation expectation since the early 1980s.
Although actual consumer price inflation stood at 2.4% as of March 2025, fears were mounting that tariffs would soon rekindle inflationary pressures. Longer-term inflation expectations had similarly deteriorated, with five-year forecasts rising to 4.4% at the time, up from 3% a year earlier, underscoring a deepening concern about persistent price increases. Simultaneously, confidence in the labour market is eroding. The proportion of consumers expecting unemployment to rise reached its highest level since 2009, following five consecutive months of increases — a troubling development given that the unemployment rate has remained at or below 4% for over three years.
Beijing’s early overtures and Washington’s strategic silence
Following Trump’s return to office, Beijing cautiously embraced a spirit of guarded optimism. Despite Trump’s protectionist campaign rhetoric, Chinese leaders hoped that pragmatism and sanity would prevail. President Xi sent his Vice President Han Zheng to attend the inauguration, signalling China’s willingness to re-engage. Trump’s inaugural address offered little cause for immediate concern: China was mentioned only once, in passing, regarding the Panama Canal. Moreover, early signals suggested Trump might be amenable to transactional agreements, including increased Chinese imports and investment into the US.
However, Beijing’s overtures were systematically rebuffed. Efforts by Foreign Minister Wang Yi to secure a meeting with then National Security Adviser Mike Waltz went unanswered, while Ambassador Xie Feng’s attempts to establish informal communication channels with influential Trump confidants, such as Tesla and SpaceX supremo Elon Musk, failed to gain traction. Letters from Commerce Minister Wang Wentao to key US officials were either ignored or redirected to lower-ranking counterparts, signalling a deliberate unwillingness to engage bilaterally.
Notably absent in Trump’s second term is the informal backchannel diplomacy that characterised his first administration, when figures like Kushner facilitated communications with Beijing. A fundamental mismatch of diplomatic styles has exacerbated the resulting vacuum: Trump’s preference for personalised, informal diplomacy clashes with Beijing’s reliance on hierarchical, protocol-driven exchanges.
However, some Trump advisers floated the idea of direct talks with President Xi Jinping’s inner circle — figures such as Cai Qi — Chinese officials declined, wary of the political risks involved. Meanwhile, US business leaders who had previously acted as informal bridges between the two capitals have largely disengaged, seeing little advantage in assuming such a role under the current climate.
Substantive negotiations on major points of friction — including tariffs and the future of the wildly popular social media platform TikTok — have failed to materialise. Instead, economic tensions escalated. Trump appeared genuinely surprised by Xi’s readiness to respond decisively; China retaliated with tariffs reaching up to 125% on American imports, demonstrating Beijing’s willingness to engage in a protracted contest.
China’s strategic calculus and narrative framing
Beijing’s response is rooted in a strategic assessment that its authoritarian governance model is better positioned to endure political and economic hardship than the US, where economic disruption tends to translate into political instability rapidly. This theory was tested when financial market turmoil, including a sharp rise in US government bond yields threatening dollar hegemony, prompted Trump to retreat partially. By April 12, his administration announced exemptions for smartphones, computers, semiconductors, and other electronics from certain Chinese tariffs. The Dragon thus identified a critical vulnerability: Trump’s relatively low tolerance for economic and financial instability and a lower threshold for pain.
Within China, a broad consensus has emerged — encompassing both critics and supporters of the government — that the unfolding contest may ultimately hinge on which leader can persuade their citizenry to endure greater hardship for national objectives.
China has strategically positioned itself as a pillar of global stability in contrast to what it characterises as American “unilateral bullying.” Rather than replicating Washington’s military alliances or global footprint, Beijing seeks diplomatic advantage, emphasising trade as a catalyst for worldwide development and reiterating its commitment to respecting national sovereignty. Official narratives highlight China’s support for high-level opening-up, adherence to a rules-based international order, and advocacy for multilateral economic governance.
Xi assesses that Trump respects strength and despises weakness, so China must stand firm. China can better absorb economic pain due to its centralised control and greater societal tolerance for hardship.
This “pain point differential” is the cornerstone of China’s current strategy. Hence, while carefully avoiding general escalation, China has prepared targeted retaliatory measures in sectors such as rare earths, aerospace (Boeing), and agriculture. In the near term, America’s vulnerabilities in financial markets and inflation expectations are viewed as more acute, whereas China’s domestic challenges — rising unemployment, weak exports, and sluggish internal demand — are expected to materialise with a longer lag. Domestic policy tools, including interventions by China’s “national team” of state-backed investors, have been deployed to stabilise equity markets and bolster public confidence. In this respect, the Chinese stock market’s low valuation and the US stock market’s high valuation are another factor in China’s favour.
Throughout this confrontation, Beijing insists that it will not be intimidated. Chinese officials reaffirm China’s commitment to mutual benefit, economic globalisation, and the defence of multilateral rules. Simultaneously, Beijing frames the US as a destabilising force undermining international norms, calling on the global community to reject unilateralism and economic nationalism.
Domestically, Chinese messaging aims to reinforce public resilience. Authorities emphasise the economy’s underlying strength, strategic readiness, and the leadership’s ability to navigate external pressures. Xi has personally sought to reassure the nation, invoking the metaphor of China as a vast, resilient ocean:
“China’s economy is a vast ocean, not a small pond. It can endure trade storms and demonstrate to the world the confidence and composure of a nation that embraces all rivers.”
Through this strategic framing, China aspires not only to withstand current challenges but to project itself as a global stabiliser — a steady, enduring presence amid mounting geopolitical and economic turbulence.
DeepSeek: A game-changing, new productive force
DeepSeek represents a transformative AI innovation poised to permeate every sector of the Chinese economy, driving broad-based productivity gains and ushering in a new era of economic vitality. China, long burdened by the structural weaknesses of a mature, outsized real estate sector and low- to mid-end manufacturing, now resembles a tiring marathon runner rejuvenated and reinvigorated by a second wind after “hitting the wall”.
Thanks to the significant role of the Chinese government and the inherent characteristics of its political-economic system, the diffusion of DeepSeek’s AI technologies is expected to be both rapid and pervasive. Decades of international research on technological development and productivity gains affirm that the speed and breadth of technological diffusion are critical determinants of economy-wide efficiency improvements.
In this respect, China enjoys a structural advantage: its strong institutional coordination and robust state support position it to capitalise swiftly and extensively on DeepSeek’s capabilities.
Case studies: DeepSeek’s applications across the Chinese economy
DeepSeek has been actively collaborating with major domestic institutions to integrate AI-driven solutions and enhance operational efficiency across a range of sectors. Recent deployments illustrate the scope and scale of its impact:
Port operations optimisation: Ningbo-Zhoushan Port
At Ningbo-Zhoushan Port, one of the busiest ports globally, DeepSeek’s AI-powered logistics and supply chain optimisation systems have streamlined container handling, reduced ship waiting times, and improved throughput. Predictive analytics have significantly lowered operational costs while boosting overall efficiency.
Public sector modernisation: Hangzhou Municipal Government
In Hangzhou, DeepSeek’s AI solutions have been integrated into smart city initiatives, optimising traffic management, energy consumption, and public safety systems. AI-powered traffic light algorithms, for instance, have reduced congestion by 20% in critical urban zones.
Manufacturing efficiency: Foxconn (Hon Hai Precision Industry)
Foxconn has deployed DeepSeek’s AI-driven predictive maintenance and quality control systems on its production lines. Real-time data analysis enables early detection of equipment failures and product defects, resulting in a 15% increase in production efficiency and significant improvements in product quality.
Healthcare innovation: Peking Union Medical College Hospital
DeepSeek’s AI technologies are enhancing medical diagnostics and hospital operations. AI-assisted image analysis, patient outcome prediction, and resource optimisation have accelerated diagnosis times and improved patient care delivery.
Education sector transformation: Tsinghua University
In collaboration with Tsinghua University, DeepSeek has developed AI-powered personalised learning platforms that analyse student performance data to deliver tailored educational recommendations, thereby improving learning outcomes.
Logistics and transportation optimisation: SF Express
SF Express, a leading logistics firm, utilises DeepSeek’s AI for fleet management and route optimisation. By analysing real-time traffic and delivery data, the system reduces fuel consumption and delivery times, enhancing operational efficiency.
Structural weaknesses in China
Since Beijing’s policy-induced deflation of China’s real estate bubble in 2020, China’s domestic economy and consumption have been tepid. Its 18-city subway passenger turnover has only just started to recover, reaching only 2023 levels.
Property sales in 30 cities are still below the year 2019. By February this year, there were some indications that prices for new properties in good locations in Tier-1 cities have been robust, after declines of 30%-45%. On the other hand, property prices in Tier-2 and -3 cities are still weakening.
The pressure from unemployment and falling domestic demand has resulted in rising protests since early 2024. It is possible that over the next three to six months, Beijing may face increasing pressure from a soft economy and escalating unemployment as well as underemployment, forcing China to compromise with Trump. We see this prospect as remote.
Future trends
Building on its experience during the first Trump administration, China has positioned itself for a sustained period of elevated economic and geopolitical tensions.
In response to the renewed imposition of US tariffs, I expect Beijing to intensify domestic stimulus measures, particularly to support small and medium-sized enterprises (SMEs), which are crucial for maintaining employment and social stability. Many more months will likely pass before key economic indicators start to reflect the dissipation of underlying weakness in the Chinese economy.
If the domestic pressures facing both Washington and Beijing become unbearable, the odds of a compromise would increase.
Should inflationary pressures in the US accelerate while growth visibly slows in the coming months, President Trump could encounter significant political challenges in the lead-up to the 2026 midterm elections. Under such pressures, Trump might be the first party to blink.
Be that as it may, the risk premium of US dollar assets has certainly risen quite substantially because of the increased unpredictability of Trump and his policy-making. Across the Pacific Ocean, the Chinese stock market, which has been deemed uninvestable, now looks decidedly investable.
Tan Kong Yam is a founding member and Chairman (China) of APS Asset Management. He is also a professor of economics at the Nanyang Technological University
