Decoding US-China Economic Dynamics: A Data Scientist’s Deep Dive into Blended Market Indicators
By Erika Barker, Economic Data Scientist
In case you’re in a hurry:
- Blended market indicators offer a more nuanced way to analyze and predict the economic trajectories of the US and China.
- These indicators combine various financial and economic factors, highlighting the economic divergence between the US and China since 2020.
- The US has shown resilience, driven by fiscal stimulus, tech sector strength, and proactive monetary policy.
- China’s economic challenges include the impact of its Zero-COVID policy, regulatory crackdowns, and real estate sector issues.
- The trend of wealthy Chinese individuals diversifying their assets globally, particularly into US markets, is driven by capital flight, wealth preservation, and educational aspirations.
- Probabilistic forecasts suggest that the US is likely to continue its moderate growth, while China faces a mix of potential recovery or prolonged stagnation.
- Policy recommendations focus on innovation, strategic industry support, and geopolitical balance for the US, and regulatory clarity, domestic consumption stimulation, and green technology investment for China.
Introduction
I remember reading this book in 2021 by Peter Diamandis called The Future is Faster than you Think and boy oh boy, do things change fast, especially global economics. As a data scientist, I’ve been fascinated with the complex relationship between the United States and China—the two big players on the global stage. But with traditional economic indicators often falling short, I decided to dig deeper. Could a new approach give us better insights into the US-China economic dance?
Enter blended market indicators—a set of composite metrics I developed to capture a more complete picture of these two economic giants. In this article, I’ll break down these indicators, what they tell us about the current state of affairs, and what they might mean for the future. Along the way, we’ll explore the significant trend of Chinese offshore investments into US assets—a phenomenon that is reshaping both economies.
The Need for Better Tools
Traditional economic indicators like GDP and inflation have their place, but let’s be honest—they often miss the subtleties. In recent years, there’s been a push to go beyond these metrics. Experts like Stiglitz, Sen, and Fitoussi (2009) have argued that we need a broader view, and that’s where composite indicators come in. These tools combine different economic and financial metrics into a single, more powerful measure.
My research builds on this idea, blending various indicators to create a clearer picture of the US-China economic landscape. This approach is particularly useful when dealing with complex, intertwined economies like those of the US and China.
Crafting Blended Indicators
So, how do you create a blended market indicator? It’s a bit like making a stew—you pick the right ingredients, mix them in the right proportions, and hope the result is greater than the sum of its parts.
Here’s what I came up with:
- US Blended Indicator:
(SPY*2 + QQQ + VTI + IWM) / (TLT*2 + GLD + VIX + DXY) - China Blended Indicator:
(FXI + MCHI + ASHR + EWH + KWEB) / (CNYUSD * DBC)
For the non-finance geeks out there, these formulas might look like alphabet soup. Let me break it down:
- Equity components (like SPY and FXI) capture how stock markets are doing.
- Bonds, commodities, and volatility indices give a sense of risk and economic sentiment.
- Currency factors (like DXY and CNYUSD) reflect international competitiveness and monetary policy.
These indicators blend together different aspects of the economy, giving us a holistic view of how things are going—and where they might be headed.
Now I wrote an entire article about how awesome using a blended market indicator is, and you can read more about it here: https://erikabarker.ai/finance/composite-scoring-for-market-analysis/
A Tale of Two Economies
Looking at the data from 2014 to 2021, one thing jumps out: the dramatic divergence between the US and Chinese economies since 2020.
China’s Boom Before the Bust
From 2014 to 2020, China was on fire, with an average annual growth rate of 8.7% compared to the US’s more modest 3.2%. This period was China’s “economic miracle,” driven by rapid industrialization, massive infrastructure investments, and the rise of tech giants like Alibaba and Tencent.
But then, the tides turned.
The Post-2020 Reversal
Since 2020, the US has shown remarkable resilience, with a cumulative growth of 15.3%, while China’s indicator has nosedived, showing a staggering decline. So, what happened?
- US Resilience: A mix of fiscal stimulus, strong tech sector performance, and quick monetary policy responses kept the US economy afloat.
- China’s Struggles: China’s Zero-COVID policy, regulatory crackdowns, and a brewing real estate crisis hit hard, leading to significant economic challenges.
The Role of Currency and Sector-Specific Trends
The US and Chinese economies aren’t just diverging—they’re moving in opposite directions. The CNY/USD exchange rate, for instance, has fluctuated in ways that reflect these broader economic shifts. While the yuan’s strength once mirrored China’s rising economic power, recent depreciation pressures have highlighted growing concerns about China’s economic future.
When we break things down by sector, the contrasts become even clearer:
- Technology: The US tech sector continues to dominate, while China’s tech industry, once a rising star, has faced significant setbacks due to increased regulatory scrutiny.
- Small-Cap Performance: In the US, small-cap stocks have shown resilience, reflecting strong grassroots economic activity. In China, small and mid-cap stocks have struggled, further emphasizing the challenges facing the broader economy.
Understanding the Limitations
While blended market indicators provide valuable insights, they come with their own set of limitations:
- Subjectivity in Construction: The choice of components and their weightings, like doubling SPY or TLT, is somewhat subjective. While I’ve conducted sensitivity analyses to test alternative weightings, different choices could yield slightly different results.
- Data Availability: Access to comprehensive and reliable economic data, particularly from China, can be limited. This may introduce some bias or inaccuracies in the indicators.
- Geopolitical Uncertainty: The indicators might not fully capture the impact of sudden geopolitical shifts, which can drastically alter economic trajectories.
These limitations remind us that while these indicators are powerful tools, they’re not crystal balls. They’re best used as part of a broader toolkit for economic analysis.
The Chinese Offshore Investment Phenomenon
A significant and often discussed trend is the surge of wealthy Chinese individuals investing heavily in international assets, particularly in the United States. This phenomenon, often termed capital flight or offshore investment, has far-reaching implications for both China and the countries receiving these investments.
Scale of Chinese Offshore Investment
The numbers are mind blowing:
- Total Outflows: China saw capital outflows of approximately $150 billion in 2022, continuing a trend of significant offshore investment (Institute of International Finance, 2023). Over a decade, from 2010 to 2020, the cumulative net outflow was a whopping $3.78 trillion (Bloomberg Economics, 2021).
- Real Estate Investment: In 2020 alone, Chinese investors poured $6.1 billion into U.S. commercial real estate, highlighting their preference for tangible assets (Real Capital Analytics, 2021). Despite a dip from previous years, the appetite remains strong, particularly in prime locations like California, New York, and Texas.
- Education Spending: Chinese students significantly impact the U.S. economy, contributing $15.9 billion in the 2019-2020 academic year alone (NAFSA, 2020). The long-term trend shows a continued preference for U.S. education, despite short-term declines due to the pandemic.
Investment Strategies and Data
- Real Estate: Chinese buyers are drawn to U.S. residential properties, often paying a premium. In 2019, they purchased $11.5 billion worth of U.S. homes, with a median price far exceeding that of other foreign buyers (National Association of Realtors, 2020).
- Art and Collectibles: The Chinese are significant players in the global art market, accounting for 17% of global sales in 2020 (Art Basel and UBS Global Art Market Report, 2021). This trend reflects their interest in alternative investments and cultural status symbols.
- U.S. Stock Market: Chinese holdings in U.S. equities have soared, reaching $1.1 trillion in 2020 (U.S. Treasury Department, 2021). This marks a dramatic rise in interest from just a decade ago, highlighting the diversification strategies of wealthy Chinese investors.
Source: American Enterprise Institute’s China Global Investment Tracker (2020 data)
Chinese Investment in US Assets Breakdown (2020-2024)
Trajectories and Future Outlook
The future of Chinese offshore investment is shaped by various factors:
- Real Estate: While geopolitical tensions and pandemic restrictions have slowed investments, the fundamental drivers—wealth preservation and educational aspirations—suggest a potential rebound in the medium to long term.
- Financial Markets: Expect continued diversification into U.S. and global assets as Chinese investors seek stability and growth outside their domestic market.
- Luxury Goods and Art: Demand for luxury goods and art is likely to increase, driven by both personal consumption and investment motives.
Expert Opinions
Experts agree on the significance of this trend:
- Brad Setser, Senior Fellow at the Council on Foreign Relations, notes that “Chinese capital outflows are likely to continue as investors seek to diversify their portfolios and hedge against domestic risks” (2023).
- Thilo Hanemann, a partner at Rhodium Group, points out that the pattern of Chinese investment is evolving from large acquisitions to more diverse, smaller-scale investments across various sectors and geographies (2022).
Looking Back—and Forward
To put these trends in context, let’s take a quick trip down memory lane. Over the past few decades, we’ve seen several distinct phases in US-China economic relations:
- 1980s-1990s: China opens up and starts growing rapidly.
- 2001-2008: China joins the WTO and integrates into the global economy.
- 2008-2015: China’s stimulus-driven growth post-financial crisis.
- 2015-2019: The beginning of trade tensions and tech competition.
- 2020-Present: Pandemic disruption and diverging recoveries.
Where do we go from here? The current divergence is striking and suggests that we may be at an inflection point in the US-China relationship.
Geopolitical Wildcards
It’s crucial to remember that economic forces don’t operate in isolation; geopolitics exerts a significant influence. Rising tensions surrounding Taiwan, technological competition (particularly in advanced semiconductor manufacturing), and trade disputes all represent potential risks that could dramatically reshape the economic landscape. A conflict over Taiwan, for instance, could trigger severe disruptions to global supply chains and financial markets. While China is likely to continue its assertive posture on Taiwan, perhaps even engaging in displays of military strength, a full-scale invasion remains improbable. Such a move would jeopardize the economic interests of influential figures within China. However, if the U.S. dollar continues to appreciate and the yuan weakens, China might perceive itself as cornered, potentially escalating tensions. The United States must therefore navigate this complex situation with prudence and strategic foresight.
Forecasts and the Road Ahead
So, what’s next? Based on my data, here are my personal probabilistic forecasts for the US and China:
For the US:
- Continued Growth (65% probability): Expect moderate, steady growth driven by innovation and strategic industry support.
- Moderate Slowdown (30% probability): Inflation, geopolitical tensions, or a tech sector correction could cool things down.
- Recession (5% probability): While unlikely, unforeseen global shocks could trigger a recession.
For China:
- Gradual Recovery (55% probability): If China manages to stimulate domestic consumption and stabilize its real estate sector, a modest recovery is possible.
- Prolonged Stagnation (35% probability): The risks of ongoing economic struggles are significant, particularly if current challenges aren’t addressed.
- Strong Rebound (10% probability): A successful reform push and geopolitical de-escalation could lead to a surprising comeback.
Policy Recommendations
Based on this analysis, here are some policy moves that could help steer these economic giants in the right direction:
For the US:
- Invest in Innovation: Boost R&D in emerging technologies like AI and renewable energy to maintain a competitive edge.
- Support Domestic Manufacturing: Encourage reshoring and strengthen critical industries to reduce vulnerabilities.
- Balance China Relations: Stand firm on intellectual property and trade, but also seek areas for cooperation. They are a large market, and it’s foolish not to cooperate.
- Ensure Fiscal Responsibility: Address national debt while continuing to invest in critical areas.
- Promote Inclusive Growth: Tackle income inequality and invest in infrastructure to support broad-based growth.
For China:
- Clarify Regulations: Provide clear and consistent policies, especially in the tech sector, to restore investor confidence.
- Stimulate Consumption: Strengthen social safety nets and promote urbanization to boost domestic spending.
- Tackle Real Estate Issues: What a mess they have. Gradually they need to deleverage the property sector and offer alternative investment options.
- Invest in Human Capital: Improve education and vocational training to address demographic challenges.
- Lead in Green Technology: Accelerate investments in renewable energy and environmental tech to create new growth engines.
To Wrap Things Up:
While the US appears to be on a steady path, China faces significant challenges—and how these two giants navigate the coming years will shape the future of the global economy. I think China has a big problem that might take over a decade to recover if wealthy Chinese citizens continue buying overseas assets.
The trend of Chinese offshore investment, despite facing recent headwinds, is a powerful force with the potential to shape global economic dynamics for years to come. As China’s middle and upper classes continue to grow, so too will their global influence through investments in real estate, financial markets, and luxury goods. This trend, along with the broader economic shifts, will be crucial for policymakers and market participants to monitor.
As data scientists, we have a crucial role in deciphering these trends and helping policymakers make informed decisions. So, let’s keep our eyes on the data, our minds on the bigger picture, and our feet ready to pivot as the world continues to change.