CICC: The "Two Accounts" of China and the United States

Since the Spring Festival, DeepSeek and Trump's tariffs have become new variables in global asset volatility, also affecting investor sentiment and the macro narrative between China and the United States. On one hand, DeepSeek has triggered a reevaluation of the value of China's AI industry and assets, impacting the narrative of the U.S. AI "one-horse show" since 2023; on the other hand, Trump's initiation of additional tariffs has intensified concerns about the U.S. inflation outlook, market sentiment, and the international trade landscape due to the policy's fluctuations.

In fact, these two major variables, AI and tariffs, are closely related to the "two accounts" of the international balance of payments (financial account and current account), and they are interrelated. The AI trend attracts capital inflows, directly affecting the financial account (which reflects financial asset transactions), while tariff policies influence imports and exports, altering the current account (which reflects actual resource flows). In principle, the balance of a country's current account and the balance of its capital and financial accounts (including reserve assets) equals zero, so the strength of one affects the other.

So, how do the financial account (AI) and the current account (tariffs) respectively influence the economic and asset trends of China and the United States? How will the new narrative of AI triggered by DeepSeek affect U.S. tariffs and even dollar policy? How should China respond to potential external disturbances? What lessons can be drawn from the different responses of Germany and Japan after the Plaza Accord? Investors often find a very real challenge when faced with these questions, namely the need to make strong assumptions about policy directions. In this article, we provide a new perspective on the "two accounts," hoping to reduce reliance on strong assumptions and answer the above questions from the perspective of practical constraints and natural laws.

United States: Financial Account Surplus vs. Current Account Deficit; AI Attracts Capital Inflows Supporting the Dollar and Economy, Creating Positive Feedback; Weakening AI or Increasing Tariffs and Dollar Risks

Since the 1980s, influenced by factors such as manufacturing relocation, low savings rates, and the privilege of the dollar, the U.S. has maintained a long-term current account deficit, with trade partners using dollars obtained from exports to flow back into the U.S. by purchasing dollar assets, resulting in a long-term surplus in the U.S. financial account. Before the global financial crisis, the U.S. current account deficit and financial account surplus reached peaks of -6.3% and 7.2% of GDP, respectively, in the third quarter of 2006. After the 2008 financial crisis, in the context of global economic rebalancing, the U.S. current account deficit narrowed, reducing to -1.8% of GDP by the end of 2019. After the pandemic, U.S. fiscal expansion has driven demand, leading to an expanded current account deficit, while the AI trend has attracted capital, causing global funds to continuously flow in through the financial account, boosting the dollar and assisting U.S. financing. This trend has been particularly evident since 2023, forming a "positive feedback" that has supported U.S. stocks and the U.S. economy over the past three years.

Chart 1: The U.S. has maintained a long-term current account deficit and financial account surplus since the 1980s![](https://mmbiz-qpic.wscn.net/sz_mmbiz_png/fzHRVN3sYsibJKLDYtk0enPGGw6fycTejPibmXhKVrXJx5oIg3enjgmrrzT1bEJVKzRBEmUXPtQpE8xCpFEZrG4g/640? Data source: BEA, IMF, CICC Research Department

Chart 2: In terms of the U.S. financial account, the main sources of inflow vary in different periods, with bonds having the largest volume in net inflows of funds into the U.S. Data source: BEA, IMF, CICC Research Department

Chart 3: However, U.S. stocks have also become a marginal driving force for capital inflows at different times, and the phases with more inflows into U.S. stocks often correspond to a strengthening dollar Data source: Bloomberg, IMF, CICC Research Department

Looking back at several phases of accelerated inflows into the U.S. financial account since the 1980s, the core pillars attracting funds and supporting the economy have varied over time. Bonds have the largest volume in net inflows of funds into the U.S., but U.S. stocks have also become a marginal driving force for inflows at different times. Ultimately, the reason funds flow into the U.S. is the attractiveness of dollar-denominated assets:

1. Either it is the attractiveness of U.S. stock assets brought by industrial trends, which needs to be based on strong or even "outstanding" industrial trends, such as the information technology revolution in the 1990s and the AI trend since 2023, both attracting a large amount of capital inflow;

2. Or it is the attractiveness of U.S. Treasuries as a safe asset, based on the dollar's status as a reserve currency and the credit of the U.S. government, especially in the context of deepening globalization, such as the increase in U.S. Treasury holdings after China joined the WTO in 2001, where the proportion of U.S. Treasuries held by overseas holders rose from 6% at the end of 2000 to a peak of 28% in 2011. However, in recent years, with the continuous increase in U.S. Treasury issuance, rising inflation has led to increased concerns about U.S. debt, especially after the intensification of de-globalization trends caused by trade frictions and the Russia-Ukraine situation. The proportion and absolute value of U.S. Treasuries held by major countries such as China and Japan have been continuously declining. Currently, China's holdings of U.S. Treasuries have fallen to $770 billion, accounting for only 9% of overseas holders. Meanwhile, Japan, the largest overseas buyer of U.S. Treasuries, has also seen its holdings drop to $1.1 trillion, accounting for 13% of overseas holders, a significant decrease from the 40% peak in 2004 This also indicates that the logic of the latter is becoming increasingly unsound, further highlighting the importance of AI and industrial trends in attracting capital inflows into the United States.

Chart 4: The two largest overseas holders of U.S. Treasury bonds, Japan and China, have been reducing their holdings of U.S. Treasuries for nearly a decade Source: Wind, CICC Research Department

If we further overlay the U.S. dollar, we can find a not entirely precise but generally valid rule: that during phases of significant inflows into U.S. stocks, the dollar often strengthens, while during phases dominated by inflows into U.S. Treasuries, the dollar may weaken. The possible explanation behind this is that the former represents the attractiveness of U.S. assets, while the latter may not necessarily indicate strong U.S. growth and industrial trends, but rather a demand for safe asset storage. Specifically:

► Reagan Cycle (1981-1987): Relying on fiscal stimulus to boost the economy and attract capital back. In the early stages, the dollar strengthened significantly, with capital flowing into financial assets. Before 1985, the Reagan administration's fiscal expansion drove economic growth and a stronger dollar, attracting capital inflows. Strong domestic demand and a strong dollar also fueled trade deficits, forming the "Reagan Cycle" of economic growth, rising interest rates, a stronger dollar, and capital inflows under the "twin deficits" of fiscal and trade. The financial account surplus continued to expand, with funds pouring into the U.S. to purchase financial assets, even bank deposits at high interest rates.

In the later stages, the "Plaza Accord" pushed the dollar weaker, with direct investment taking over, and funds continued to flow until the "Black Monday" stock market crash in 1987. The continuous strengthening of the dollar and the persistent accumulation of the U.S. trade deficit affected U.S. exports and growth, prompting the 1985 Plaza Accord to artificially intervene and weaken the dollar. From 1985 to the low point in 1987, the dollar index fell by nearly half, but the significant appreciation of currencies like the yen promoted Japan to expand foreign investment through direct overseas ventures. After the dollar weakened, direct investment took over, with the share of U.S. FDI inflows in GDP rising rapidly from 0.2% in 1985 to 1.3% in 1989, with funds continuing to flow until the "Black Monday" stock market crash in 1987, and the current account deficit also began to narrow after 1987.

Chart 5: After the Plaza Accord, the dollar depreciated, but net inflows of funds into the U.S. still increased until the 1987 stock market crash Data source: Haver, Bloomberg, CICC Research Department

► Information Technology Revolution (1995-2001): Growth supported by the internet revolution, fiscal contraction, but high interest rates and the Asian financial crisis led to capital flowing back to U.S. Treasuries. After 2000, U.S. stocks turned to net inflows and became the marginal driver of capital inflows, with the U.S. dollar strengthening significantly. In the 1990s, the rapid development of internet technology led to a sharp increase in the year-on-year growth rate of total factor productivity in the U.S. non-farm business sector, rising from 1.1% in 1995 to a historical high of 2.2% in 1999. Fiscal policy contracted, with the government leverage ratio decreasing from 65.2% in 1996 to 54.8% in 2001, but high interest rates (the average 10-year U.S. Treasury yield was 6% from 1995 to 2001) and the Asian financial crisis still prompted net capital inflows into U.S. Treasuries, with the quarterly average inflow into bonds under the financial account securities investment reaching $44.7 billion during this period. After the fourth quarter of 1999, capital shifted from net outflows from U.S. stocks to net inflows, becoming the marginal driving force for capital. Before the burst of the tech bubble in 2001, net inflows into the financial account were more than ten times that of early 1996, pushing the U.S. dollar from 80 in mid-1995 to a peak of 120 in 2001.

Chart 6: Significant increase in total factor productivity during the Information Technology Revolution, attracting capital inflows due to technological trends Data source: Haver, CICC Research Department

► After China's accession to the WTO (2001-2007): Expansion of fiscal and trade deficits, weakening of the U.S. dollar, yet still able to attract capital inflows into U.S. Treasuries amid deepening globalization. After China joined the WTO in December 2001, the U.S. current account deficit as a percentage of GDP rose from 3.3% in the fourth quarter of 2001 to a peak of 6.3% in the third quarter of 2006. Meanwhile, the Bush administration shifted to an expansionary fiscal policy, with the government leverage ratio increasing from 54.8% in 2001 to 62.6% in 2007. During this phase, the U.S. dollar weakened due to the impact of the tech bubble burst and events like "9/11," but still attracted capital to flow back in the form of U.S. Treasury purchases, with net inflows into bonds rising from $94.4 billion at the end of 2001 to a peak of $287.5 billion in the first quarter of 2007. A significant portion of China's accumulated trade surplus foreign reserves was also used to purchase U.S. Treasuries, with China's holdings of U.S. Treasuries accounting for nearly 40% of its foreign reserves before 2007, increasing China's share of U.S. Treasuries held overseas from 6% at the end of 2000 to a peak of 28% in 2011 ► Trump 1.0 Capital Inflow (2018-2020): Tariffs to Improve Current Account, Weak Dollar, but Fiscal Expansion Combined with Tax Cuts and Deregulation Attracts Funds in the Form of Bonds and Direct Investment. In 2018, Trump imposed tariffs to improve the current account deficit, resulting in an overall weak dollar. However, continuous fiscal expansion, along with tax cuts and deregulation policies that encouraged investment, attracted funds in the form of bonds and direct investment, leading to a rebound in net inflows to the U.S. after the third quarter of 2018.

► Post-Pandemic (2020-Present): Fiscal Expansion Combined with AI Trends Attracts Capital Inflows, U.S. Stocks Dominate Since 2023, Strong Dollar. In the early stages of the pandemic, global trade imbalances worsened again, with the U.S. current account deficit as a percentage of GDP rising from 1.8% in early 2020 to a peak of 4.6% in early 2022. The fiscal response to the pandemic involved significant expansion, with the fiscal deficit rate peaking at 16.2% in 2020. Coupled with the Federal Reserve's interest rate hikes in 2022, this strengthened the dollar and attracted funds into bonds. Since the end of 2022, the emergence of AI narratives driven by ChatGPT has led U.S. tech giants to outperform globally, becoming a marginal driving force for net capital inflows into the U.S. The combination of AI trends and fiscal expansion has attracted capital inflows to the U.S., forming the "three pillars" supporting the U.S. economy.

Chart 7: After the Release of ChatGPT at the End of 2022, AI Narratives Drive U.S. Tech Giants Up! Source: FactSet, CICC Research Department

Chart 8: Currently, the U.S. Combines Fiscal and Tech Trends, but Debt Burden Reaches Historical Highs, Dollar Trends May Affect Capital Flows and Even Global Economic Patterns! Source: Bloomberg, Haver, CICC Research Department

China: Current Account Surplus vs. Financial Account Deficit, Stronger External Demand but Capital Outflow; Boosting Domestic Demand as a Hedge, Tech Narratives Attract Capital

In contrast, since China joined the WTO in 2001, the current account has maintained a long-term surplus, with external demand continuously supporting the economy, while the fluctuations in the non-reserve financial account have been more pronounced. Due to China's long-term trade surplus accumulating a large amount of foreign exchange reserves, the scale of reserve assets held by the United States as a reserve currency country can be negligible, and the changes in the financial account are almost entirely dominated by private sector capital flows. Therefore, when comparing the "two accounts" of China and the United States, using China's non-reserve financial account for comparison can more accurately reflect the differences in capital flows of market entities.

In the past three years, in stark contrast to the United States, China's current account surplus has continued to expand (reflecting that external demand is stronger than domestic demand), while funds in the financial account have continuously flowed out (for example, since 2021, long-term foreign capital has continued to flow out of Hong Kong stocks). The foreign exchange surplus accumulated from the current account surplus has not fully converted into RMB, thus failing to form effective capital inflows, making it difficult to drive a virtuous cycle of funds in the real economy (reflected in the fact that foreign reserves have not significantly increased, indicating insufficient willingness of enterprises to convert foreign exchange). Specifically,

Chart 9: Since joining the WTO in 2001, China has maintained a long-term current account surplus, while the balance of the non-reserve financial account has fluctuated more significantly Source: SAFE, CICC Research Department

Chart 10: While the current account surplus has increased, there has been no significant increase in foreign reserves, which also reflects insufficient willingness of enterprises to convert foreign exchange, resulting in a lack of positive circulation of funds in the real economy Source: SAFE, CICC Research Department

► After joining the WTO (2001-2007): Both current account and financial account surpluses. After China joined the WTO in 2001, the current account surplus continued to expand, and the non-reserve financial account also maintained inflows under high economic growth. During this period, the proportion of the current account to GDP increased from 1.1% to a peak of 6% in the third quarter of 2007. If calculated on an annual basis, the current account reached nearly 10% of GDP in 2007. The non-reserve financial account also benefited from the continuous increase in direct investment, maintaining a surplus, with the balance of the non-reserve financial account as a proportion of GDP growing from 1.7% to 3.4% ► Post-Financial Crisis (2008-2018): Current Account Surplus Narrows, Financial Account Experiences Three Increases and Three Decreases. The shrinkage of external demand led to a decline in exports, and in 2018, the ongoing Sino-U.S. trade friction further disturbed the situation, causing the current account surplus to continue narrowing, with its GDP share dropping to 1% in 2011, 2014, and again in 2017. In the first quarter of 2018, there was even a deficit for the first time since joining the WTO. During this period, however, the non-reserve financial account surplus experienced three significant expansions: corresponding to 1) the domestic "4 trillion" economic stimulus in 2008, 2) the influx of funds attracted by the mobile internet and smartphone boom from 2012 to 2014. After a significant market correction following a peak in 2015, the non-reserve financial account turned into a deficit during this period, with its GDP share falling to -3.3% by the end of 2025, until 3) the bull market driven by the monetization of shantytown renovations from 2016 to 2017 turned it back into a surplus.

► Post-Pandemic (2020 to Present): After the pandemic, China's current account surplus expanded again, while net outflows in the financial account increased. By the fourth quarter of 2024, the current account surplus accounted for 2.1% of GDP, the highest level since the third quarter of 2012. This also indicates an increased reliance of the economy on external demand, but this model is susceptible to constraints from U.S. trade policies. Factors such as intensified de-globalization, the escalation of the Russia-Ukraine situation, and relatively weak domestic demand have led to increased outflows in the financial account, with the non-reserve financial account deficit expanding to -2.5%, the lowest level since the third quarter of 2016, making it particularly important for technology narratives to attract capital inflows.

The Linkage, Impact, and Response of the "Two Accounts" between China and the U.S.: The "Trio" of AI, Tariffs, and the Dollar, More Critical in 2026

As mentioned above, post-pandemic, the U.S. has relied on AI narratives and fiscal expansion to continuously expand financial account surpluses and attract ongoing capital inflows, which are also the three major "macro pillars" supporting the U.S. economy; meanwhile, China's current account surplus and financial account deficit have been continuously expanding, with increased reliance on external demand and ongoing capital outflows . The "two accounts" of China and the U.S. are closely linked through the current account (tariffs), while the financial account (AI) may be the key to determining future trends, and this is true for both countries.

► For the U.S., whether the inflow of funds into the financial account can be sustained will be crucially dependent on AI. As analyzed earlier, the inflow into the financial account relies on the attractiveness of dollar assets, which comes from the "outstanding" returns under technological trends and the properties of safe assets.

Currently, under high interest rates and high debt, relying solely on fiscal measures is unsustainable, and in the context of de-globalization, the willingness of overseas holders to purchase U.S. Treasury bonds is not what it used to be. The uncertainties brought by Trump 2.0 are increasing rather than decreasing, and de-globalization may deepen further, making it hard to imagine that global investors will significantly increase their holdings of U.S. Treasury bonds, especially in regions with tense trade and geopolitical relations with the U.S. Japan and China, the two largest overseas holders of U.S. Treasury bonds, are both reducing their holdings; Japan's share among overseas holders has dropped from 40% in 2004 to the current 13%, while China's share has decreased from 28% in 2011 to the current 9% In recent years, the main funding for increasing holdings of U.S. Treasury bonds has come from individual investors in the United States (who have increased their holdings by $2.3 trillion from early 2022 to now), while the incremental overseas funds mainly come from Canada and Europe. From early 2022 to now, Canada, the UK, and France have increased their holdings of U.S. Treasury bonds by $154.7 billion, $116.2 billion, and $108.6 billion, respectively.

It is evident that the key to continuing to attract capital inflows lies in AI. The ongoing global capital rebalancing flowing into the U.S. is precisely due to the unparalleled attractiveness of the AI industry. Funds are continuously flowing in through capital accounts, which not only boosts the dollar but also helps finance the U.S., creating a positive feedback loop that offsets the significant deficit in the current account (similar to the "Reagan cycle," achieving a positive feedback of capital return through financial accounts, akin to the views of Bessenet [1]). All of this further highlights the important role of AI in the U.S. economy and capital circulation.

Therefore, AI plays the role of the "key point" in the "grand chess game" of tariffs, capital, and geopolitics: 1) If the trend of U.S. AI can continue or even strengthen, it will maintain the current strength of the dollar, attract global capital inflows, and promote a positive feedback loop for U.S. stocks and wealth effects, which aligns with the views of U.S. Treasury Secretary Bessenet. At this point, if the U.S. forcibly promotes a weak dollar and tariff policies, it may instead affect the inflow of financial accounts, leading to counterproductive results. 2) Conversely, if the trend of U.S. AI advantages cannot be sustained, and its unique position is shaken or even reversed by models like DeepSeek, the trend of inflows in financial accounts will inevitably slow down, undermining the foundation for a strong dollar. This would not only impact U.S. growth and the stock market but also exacerbate the current "twin deficits" in fiscal and current accounts, which may prompt the U.S. to shift its focus toward improving the current account and other means. Therefore, there would be more motivation to reduce the trade deficit through tariff measures or to allow for a competitive devaluation of the dollar (effectively increasing tariffs) to gain benefits in other areas (similar to the "Plaza Accord," achieving capital inflows through trade and investment items, where a weaker dollar is more favorable, aligning with the views of Lighthizer [2]).

Chart 11: The "two accounts" of China and the U.S. are closely linked through the current account (tariffs), while the financial account (AI) may be the key to determining future trends Source: CICC Research Department

► For China, tariffs may affect the model of economic growth driven by current account surpluses, making it more important to stimulate domestic demand through policy while attracting capital inflows to improve the financial account. Currently, DeepSeek has sparked optimistic sentiment and value reassessment regarding China's technology trends, but it is more of a structural market, and short-term sentiment has somewhat been exhausted (《Reassessment of Chinese Assets》、《Revisiting the Prospects of Reassessing Chinese Assets》) Looking ahead, on one hand, in the context of Trump's tariff increases and weakening external demand, boosting domestic demand in China becomes more important. On the other hand, the current technology narrative is more influenced by sentiment, and whether long-term technological trends and macro narratives can be realized is key to attracting funds to flow back in, which also requires more structural policy support.

After the Plaza Accord, the different responses of Germany and Japan determined their subsequent development prospects. Japan continued to lower interest rates after 1985, only switching to rate hikes in 1989. The sustained low interest rates stimulated domestic demand and pushed up Japanese asset prices, but also created an asset bubble, ultimately leading to a prolonged deleveraging period known as the "lost thirty years." In contrast, Germany was more cautious with monetary stimulus, lowering rates slowly and timely switching to rate hikes in 1988, coupled with the demographic dividend from the reunification of East and West Germany, which allowed the German economy to stabilize successfully after the Plaza Accord. Therefore, while stimulating domestic demand is necessary, structural reforms and promoting long-term upgrading and transformation factors are more critical.

Chart 12: Japan's sustained and extremely low interest rates led to a significant rise in asset prices, but fiscal spending narrowed Source: Haver, CICC Research Department

Chart 13: Germany's monetary policy is more cautious, with slow rate cuts and fast rate hikes Source: Haver, CICC Research Department

Whether for the AI trend or tariff policy, 2026 may be more critical. The rise of DeepSeek has clearly dealt a "blow" to the previous narrative of the U.S. being the sole leader in AI, but whether it will lose its leading advantage or even reverse remains to be seen, as major U.S. AI leaders continue to invest heavily in capital expenditures, and the potential of edge applications is yet to be realized, with the level of bubble far less than during the tech bubble period. Therefore, 2026 could be a key validation year for AI, with the iteration of models, sustainability of capital expenditures, and prospects for edge applications all being crucial. Additionally, 2026 coincides with the change of the Federal Reserve Chair (in May) and the midterm elections (in November), and prior to this, inflation and market pressures may impose "real constraints" on Trump’s aggressive push for tariffs and supply-side inflation policies related to immigration, but the uncertainties after this may be greater (The "Near Worries" and "Distant Concerns" of Tariffs) Chart 14: American AI leaders continue to invest heavily in capital expenditures Source: FactSet, CICC Research Department

Chart 15: Short-term inflation disturbances increase, facing upward pressure Source: Haver, CICC Research Department

Original authors: Liu Gang, Xiang Xinli, Yang Xuanting, Source: CICC Insights, Original title: "CICC: The 'Two Accounts' of China and the United States"

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