Imbalances persist, but the geopolitical and economic context has changed.
Ahead of the Washington Summit on Thursday where Xi Jinping and Donald Trump will meet face to face, Christy Tan, Senior Investment Strategist, Franklin Templeton Institute notes that the global economy has entered a new phase.
“The familiar early 2000s configuration of China as the world’s capital expenditure engine and the United States as the world’s consumption engine has inverted.[1]
“The central investment implication is straightforward: the next stage of global imbalances favours assets tied to productive capacity in deficit economies and domestic absorption in surplus economies. The US must build, and China must consume. The investors who recognise that inversion, and who remain disciplined about valuation, policy risk, and geopolitical uncertainty, will be better positioned for this new regime,” says Tan.
The early 2000s world was built on a powerful complementarity. China produced; America consumed. China saved; America borrowed. China accumulated reserves; the US supplied safe assets. China built factories, cities, ports, roads, railways and housing; US households absorbed the output through rising leverage, expanding housing wealth and strong real consumption.
“This system was imperfect and ultimately unstable, but for a period it generated strong corporate profit opportunities on both sides,” she adds.
In the United States, retailers benefited from cheap imported goods and expanding consumer purchasing power. Housing related firms benefited from lower rates, mortgage credit creation and rising home prices. Consumer finance firms benefited from rising leverage. Autos, media, restaurants, apparel, logistics and import distribution were all tied to the strength of domestic demand.
“The US was the world’s consumer of last resort, and its equity market reflected that role. In China, the dominant themes were buildout and scale. Urbanisation created extraordinary demand for housing, cement, steel, glass, copper, power, heavy machinery, construction services, rail, ports and banks. World Trade Organisation accession opened global markets to Chinese producers, while internal migration supplied labour and coastal provinces became export platforms.[2]
“In that environment, capital expenditure was not a symptom of excess; it was the foundation of productivity growth. China’s corporate winners were often those that supplied, financed or executed the buildout.
“That world was held together by globalisation, relatively benign geopolitics, expanding trade and a broad assumption that economic integration would deepen over time. External imbalances were large, but they were embedded in an integrating system. The US–China imbalance was not only a macroeconomic condition; it was the operating model of global growth.”
Tan says “The current backdrop is very different. Imbalances persist, but the geopolitical and economic context has changed. The world is no longer organising around maximum efficiency, open ended integration and low cost production. It is increasingly organising around resilience, security, redundancy, strategic capacity and political alignment. Tariffs, export controls, sanctions, investment restrictions, industrial policy, defence spending and supply chain diversification have moved from the periphery to the centre of economic policy.
“That shift matters because global imbalances are no longer housed within a cooperative globalisation regime. They are now housed within a competitive geopolitical regime. The old pattern was fragile because it relied on leverage and excess demand. The new pattern is fragile because it relies on a deficit country with fiscal strain and a surplus country with weak household demand and excess productive capacity.”
She adds “The United States remains a consumption powerhouse, but the marginal opportunity has shifted. The consumer is still large, but the most important investment question is no longer how much more the household sector can borrow and spend. It is whether the US can convert domestic and foreign capital into productive capacity. Several constraints define the new US opportunity set like the digital economy has become physical, electricity has become strategic and industrial capacity has regained political value. Defence and national security have become structural growth markets. The US defence industrial base is being asked to support deterrence in Europe, the Indo Pacific, the Middle East, cyber space and outer space. The opportunity extends beyond prime contractors to suppliers of electronics, propulsion, shipbuilding, drones, cybersecurity, satellite systems and dual use technologies.”
The important point is that the US opportunity is now less about final household demand and more about capital deepening. The investable question is: which firms help the US overcome constraints in compute, power, labour productivity, supply chain resilience and national security?
“China faces the opposite challenge. For many years, capital formation was the correct investment lens. The country needed roads, ports, housing, power plants, factories, airports, urban transit and industrial capacity. The corporate opportunity was linked to the physical transformation of the economy.
“But the very success of that model has reduced its future return. China is no longer structurally underbuilt in the way it was in the early 2000s. It remains capable of world class infrastructure and manufacturing execution, but broad investment led growth now faces diminishing returns. Property investment has softened, and local governments face sizable debt burdens. Capacity growth in several sectors has outpaced domestic demand.[4] Exports remain strong in many advanced manufacturing categories, but that strength increasingly generates trade friction abroad.
“The result is that China’s sustainable opportunity set has shifted toward consumption and services.
“The China opportunity is more conditional than the US capex opportunity. US productive investment is already visible in data centres, semiconductors, defence budgets, power demand, and industrial policy. China’s consumption transition requires policy support. It requires a willingness to shift resources from producers to households, from local government investment to social welfare, and from export competitiveness to domestic income growth. That is economically sensible, though it involves complex structural and institutional coordination across multiple levels of government.”
Tan says “This distinction is crucial for investors. The reversal is clear, but not symmetrical. In the US, the capex opportunity is active, observable, and increasingly consensus. The risk is valuation, concentration, and execution bottlenecks. In China, a potential recovery in consumption presents a different opportunity set, supported by attractive valuations and improving sentiment. The key consideration is the pace and extent of policy support and whether it translates into a sustained recovery in household demand and consumer confidence.
“China can still produce compelling opportunities in advanced manufacturing, batteries, electric vehicles, automation, robotics and industrial technology. But those are not the same as the broad capex story of the early 2000s. They are more selective, more exposed to tariffs and export controls, and more dependent on technological upgrading than on catch up urbanisation. The broad macro opportunity is no longer China builds but it is China rebalances.”
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