Top of the Morning: China at two speeds - Reflections from the ground
The desk frames the current dynamics in China as a dual-speed economy, navigating between high technological advancement and entrenched consumer caution. Per the full note , this complex backdrop is marked by ambitions in artificial intelligence contrasted against a sluggish property sector and wary consumers. The ongoing competition and regulatory environment will heavily influence currency movements, with heightened volatility expected in response to geopolitical events. Understanding these nuances is critical as traders position themselves ahead of key economic indicators that could emerge in the coming weeks.
What the desk is arguing
The thesis highlights the conflicting forces in China: rapid innovation and digital transformation coexisting with economic caution and real estate woes. These intricate dynamics, as observed by Xingchen Yu during his recent visit, signal that traders need to be attentive to consumer sentiment and market competitiveness as they assess overall economic health and its impact on the yuan.
Supporting this view, data from recent reports indicate that while sectors such as AI are thriving, consumer spending remains tepid, primarily due to concerns over property market stability. This duality underscores a more complex landscape than traditional growth narratives suggest, impacting capital flows and currency valuations.
Where it sits in our coverage
Our internal consensus for the yuan suggests a target of 1.075, with a range tight at 1.04 to 1.12, supported by jpmorgan aligned at 1.10 for the March 2026 tenor and opposed by bofa projecting a lower bound of 1.04.
This positioning indicates a bullish outlook relative to bofa’s bearish stance, positioning the desk’s view towards the upper end of the consensus range, highlighting confidence in a gradual recovery in consumption as property pressures ease.
How other firms see it
Firms like jpmorgan and others are aligned with a cautiously optimistic outlook on the yuan, similarly reflecting on the prospects of technology-led growth and its impact on the overall economy. Contrarily, bofa presents a more skeptical view, concerned about long-term consumer sentiment and property sector stability.
Traders should also note related dynamics in the EUR/USD trajectory, which may parallel Chinese economic data releases, providing additional context for currency behavior.
What the calendar says
With no high-impact events scheduled, the next few weeks will predominantly rely on geopolitical developments and market sentiment. Traders should remain alert for any statements from government officials or economic data releases that could shift the narrative significantly, particularly surrounding consumer behavior and property market conditions.
01China's economy is operating at two speeds: robust AI growth vs. cautious consumer spending.
02The property sector continues to put downward pressure on overall economic sentiment.
03Geopolitical factors and consumer confidence will play pivotal roles in future currency movements.
04The yuan's trajectory is closely linked to upcoming economic data and external market perceptions.
Market implications
Traders should monitor the yuan closely as it responds to economic data and geopolitical tensions. A break above 1.10 could signal renewed confidence, while declines below 1.04 may reinforce bearish sentiments, indicating deeper economic issues at play.
Risks to this view
Any significant deterioration in China's property market or a surge in consumer pessimism could quickly undermine the current outlook. Additionally, unforeseen geopolitical tensions or trade disruptions could also prompt a reassessment of the yuan's current trajectory.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning. Joining me here for the conversation today, glad to welcome back to the podcast from the UBS Chief Investment Office within UBS FSI, Senior Investment Strategist from the Emerging Markets Team, Xingchen Yu.
Xingchen, it's great to be back on the mic with you. I know it's been some time since you were last on with us, but great to have you back today. Thank you for dropping by.
Thank you so much, Dan, for inviting me. So good to be back. Absolutely.
And for our listeners, we will be referencing Xingchen's recent blog, which, by the way, is available for you now up on UBS.com slash CIO. And Xingchen, I know you recently spent some time in China. So perhaps as a good starting point, can you talk to us about your visit, your previous visit to China as a journey through contrasts?
Two years later, what stood out most to you? Definitely. I think what struck me was that those contrasts that you just brought up, right, haven't really disappeared.
In some ways, they've become sharper. I visited more than half of a dozen Chinese cities, attended UBS Asia Conference in Shenzhen and met with companies, investors, experts and policy advisors. But I also got to spend some time with family and have everyday conversations in the society where I grew up.
Across these experiences, I saw a country moving at different speeds. Digital services are extraordinarily convenient, and there's considerable momentum behind investment in artificial intelligence. Yet consumer demand remains quite challenging, subdued, right?
Competition is intense and property market continues to weigh on confidence. So this trip didn't really overturn my earlier impressions. It actually reinforced them while adding a new sort of dimension.
I think progress is moving quickly, but translating that progress into stronger household and business confidence still remains a work in progress. With that, Cheng Cheng, can you provide us with an example of that digital convenience and maybe explain how it connects to China's AI ambitions? Sure.
One example would be actually something I first tried two years ago, ordering food, drinks from a local vendor while on a high-speed rail, high-speed train, and having it delivered at the next stop without having to lift my feet. I tried again this time. All good.
What changed, I think, wasn't the service itself, but how normal it felt. Now, that level of convenience is increasing in expectation. You can check nowadays, you know, medical results, obtain personal records, or join a restaurant queue through platforms you already use every day.
The impressive part isn't one particular application, it's how seamlessly these services fit together in one ecosystem. That matters, in my opinion, for AI because there are already established channels for reaching consumers. People may not need to download a new application or change their habits significantly, right, to access new capabilities.
Digital convenience and AI aren't really the same thing. They are not, right? But that digital foundation or platforms that people rely on could be an important advantage in bringing AI into everybody's life.
Now beyond the consumer experience, what did you hear about AI investment as the commercial payoff-keeping pace? Investment momentum was indeed a recurring theme. Investments pointed to a very strong demand outlook for AI hardware, including domestically produced advanced processors, memory chips, and other components with supplies under significant pressure.
Data center development, on the other hand, for instance, in places like Indo-Mongolia was also particularly striking. Its relatively cool climate, low land cost, and access to abundant renewable energy make places like this very attractive for computing infrastructure. And that fits with China's so-called East Data and West Computing strategy.
On the other hand, the commercial picture, however, was a little bit more mixed. Businesses still face questions about cost, data security, and how to integrate AI into the operations. Humanoid robotics is another exciting area, for instance.
But limited real-world data and safety concerns also remain hurdles. So I would, in a nutshell, distinguish between building AI capacity and earning returns from it. The investment is, without a doubt, tangible, and the productivity potential is also very substantial.
But widespread adoption and broad commercial returns are still a work in progress. You also go on to describe the pressures beneath that progress. What did your conversations reveal about involution?
Involution describes intense competition in which people work harder without necessarily becoming better off. For instance, several ride-sharing or ride-hailing drivers on the ground in China told me that they were working longer hours and completing more trips than a few years earlier, yet still earning less overall. Those are individual accounts, of course, not a representative survey.
But I think they illustrate a tension, which is the same, I guess, competition that gives consumers low prices and fast services can also make it harder for the people providing those services to earn a satisfactory return. There's also a, I guess, social safety net or social protection dimension. Many of the drivers and also delivery riders, for instance, belong to the quote-unquote flexible workforce and don't have the same access to employer-linked retirement, health, or unemployment benefits as other formal employees.
For me, this was really the flip side of the convenience I enjoy as a consumer. Greater efficiency and more activity don't necessarily translate into better incomes or greater financial security and ultimately confidence for everyone involved. Now, throughout your travels, I'm sure you came across shopping malls, residential developments of the ones, Zhengchen, you visited.
Tell us about domestic demand. What did you pick up on? I think one example I cited was the mall right near my family's home, which I think offer a useful illustration.
Two years ago, I wrote about it. I said an almost empty mall, right, while another shopping center nearby was preparing to open. On this trip, I noticed that another new shopping center had been added.
It was lively, a lot of business, you know, food traffic in general over there. But the older centers just a couple, several streets, several blocks away, look even quieter than before. So that suggested something a little bit more nuanced than simply just people aren't spending, right?
Some demand appeared to be shifting toward newer developments rather than expanding across the market. A busy new mall can therefore coexist with pressure on surrounding businesses. On the other hand, residential property also looked quite subdued.
On the outskirts of some major cities, for instance, I saw apartment complexes with few signs of occupancy. You can't infer, of course, you cannot infer vacancy rates or the national outlook from those anecdotal observation. But what I saw, the bottom line is offer little evidence of a broad turning point.
And that property sort of market property value still remains very important for household confidence. Interesting. So if weak demand is such a challenge, what kind of policy response did you hear discussed?
What stood out was the latest emphasize on investment-led support. At the UBS Asia conference, one senior policy advisor remained relatively constructive at arguing that policy execution and possible additional stimulus could keep growth within the target range. And while acknowledging insufficient demand as a significant challenge, with some consumption support measures described as nearing the end of their current cycle, discussions suggested that government investment could also play a greater role.
Large-scale direct transfer to households appeared less likely, and some experts questioned whether they would really lift spending as much as they did in Western economies during the pandemic. Further monetary easing was also discussed, but cheaper borrowing alone may not persuade cautious households to spend or businesses to expand, particularly when property values and future sales remain uncertain. A stronger social safety net could, of course, help over time, but, again, it's going to be a gradual process.
So I guess the broader point is that supporting growth and rebuilding confidence are related, but they're not really quite the same task. It's timely that you're joining us because last week we did see that President Xi Jinping of China met with President Trump in Washington, D.C. This was a highly anticipated three-day summit.
How did that summit fit with what you heard, and what is your overall takeaway from China? Indeed, a very interesting topic and an important one. I think, in a nutshell, it reinforced what I heard during the trip, which is engagement and strategic competition are continuing side by side.
The summit from last week, its strongest message was, in my view, political. The personal welcome at the airport by President Trump and elaborate sort of state ceremonies projected respect and a desire for stability. That matters because it gives negotiating teams political backing to keep working through difficult issues.
There were also practical outcomes, for instance, the extension of the tariff, reciprocal tariff reductions on selected non-sensitive goods, and the establishment of an AI dialogue. That last point is particularly interesting given how central AI is to both countries' technological ambitions. But I wouldn't describe all of this as breakthroughs.
Differences over advanced technology, critical minerals, trade, and geopolitics remain. A warmer public tone doesn't necessarily mean those differences have narrowed. Both sides have reasons to avoid destruction.
Washington has an interest in limiting economic uncertainty ahead of the midterm elections, while Beijing benefits from a stable, excellent environment as it addresses domestic priorities. Well, Jingchen, a pleasure having you back on top of the morning today. Very insightful to hear about your visit to China, what you picked up on, and some timely takeaways from last week's U.S.-China summit in Washington, D.C.
So thank you again for dropping by today, Jingchen, and look forward to picking back up with our conversation again soon. Thanks very much. Thank you.