Global "Wash" Trading? What Are Its Implications for China?

1. Global Wash Trade

(1) How to understand Wash’s idea of “rate cuts + balance sheet reduction”?

From a high-dimensional to a low-dimensional perspective, we can summarize Wash’s philosophy into three relationships: First, reshaping the relationship between money and fiscal policy. Wash opposes excessive quantitative easing and supports the Fed shrinking its balance sheet (though not denying the full value of QE; necessary QE operations during crises are acknowledged). Second, reconstructing the relationship between money and technology. He believes that the prosperity driven by AI development and relaxed regulation can lead to productivity and supply-side growth without inflation, focusing on AI’s role in releasing supply. Third, redefining the relationship between monetary policy and markets: he thinks the Fed’s decision-making should shift toward strategic trend judgment rather than the current Powell-led, overly data-dependent approach, and also opposes the current excessive communication between the Fed and markets, which he believes creates policy dependence.

Combining these three dimensions, we see the widely circulated Wash policy combination: “balance sheet reduction + rate cuts.” It may seem contradictory, but its underlying logic is coherent. Specifically:

First, the core logic of rate cuts: Currently, the market consensus is that the constraints on US economic growth are not demand-side but supply-side. If AI technology can boost productivity and efficiency to a prosperous level, allowing supply to keep pace with demand, the US economy can achieve high growth with low inflation. In this scenario, the neutral interest rate is likely to decline, and policy rates have room to be lowered. This is the main rationale for rate cuts.

Second, the core logic of balance sheet reduction: Resource allocation should dynamically adjust based on the private sector’s development status—when the private sector leverages technological revolutions to boost productivity, market-based resource allocation is most efficient; when the private sector faces deleveraging cycles and stagnant productivity growth, the government needs to leverage more to help the economy through crises, involving government intervention and resource allocation, such as after the 2008 financial crisis when the private sector struggled and productivity stalled, requiring government leverage and central bank expansion. However, if Wash’s view that AI can trigger a new private sector tech revolution and steadily improve productivity is correct, then resource allocation should revert to the market, and fiscal intervention should be reduced. In this context, the central bank should shrink its balance sheet, banks should relax regulation to expand their balance sheets, and banks should extend credit based on market logic. The shrinking of the central bank’s balance sheet and banks’ expansion form a hedge, reshaping the boundaries between monetary and fiscal policy while maintaining financial stability on the liability side of the real economy.

Third, the policy idea of “balance sheet reduction + rate cuts”: This combination can alleviate the US fiscal debt dilemma from multiple angles and is its core value. High growth expands the tax base and reduces social safety net expenditures; low interest rates lower government debt service costs. Together, they reshape the boundaries of monetary and fiscal policy, which is also a key reason why Trump would likely prioritize nominating Wash.

(2) What impact does this have on US monetary policy?

Wash’s ideas influence the Fed’s monetary policy in the short and medium term:

First, limited short-term impact: On one hand, Wash has not explicitly committed to large rate cuts by 2026, and with employment data not weakening further, it’s unlikely he can quickly persuade hawkish FOMC members. On the other hand, the productivity boom driven by AI remains a narrative needing time to verify, not an established fact. Additionally, the Fed currently lacks conditions for rapid balance sheet reduction; restarting balance sheet reduction without first easing banking regulations could trigger liquidity crises and a sharp rise in long-term rates, conflicting with Trump’s goal of lowering government debt financing costs.

Second, medium-term focus on AI implementation: If Wash’s leadership leads the Fed to reach a consensus that “productivity-driven prosperity allows for low interest rates and non-inflationary growth,” then the Fed will further open space for rate cuts and balance sheet reduction.

(3) What impact on markets?

**First, we believe recent market volatility is not solely triggered by Wash’s nomination; the previous day’s market already hinted at this. On January 29, the dollar index bottomed out, gold showed a doji pattern, and Microsoft’s earnings beat expectations, especially in AI-related segments, confirming that the AI prosperity narrative remains intact. Wash’s nomination further reinforces this logic, as markets believe his ideas can reshape US debt and currency discipline, boosting confidence in the dollar, leading to a rebound in the dollar index. Meanwhile, gold, silver, and Bitcoin, which previously served as substitutes for dollar credit concerns, have retreated to varying degrees, while commodities like oil and copper, more directly tied to economic fundamentals, showed smaller fluctuations.

Second, market volatility may increase in 2026: If Wash reduces communication and forward guidance after taking office, markets may react more sharply when they are unprepared. This impact will be more pronounced in 2026, as the global rate-cutting cycle from 2024-2025 approaches its end, and the global monetary policy shift is a period prone to asset price volatility. Coupled with Wash’s communication style changes, market fluctuations could become more evident.

Third, in the medium to long term, the core contradiction in global markets remains the evolution of political order and industrial structure. Whether US assets perform well depends not on who Wash is but on whether US productivity prosperity can shift from narrative to reality. If Wash’s narrative proves correct—US rate cuts lead to high growth and low inflation, and the fiscal deficit narrative is reversed—then the supply-demand imbalance of US Treasuries will ease, significantly boosting dollar assets. Conversely, if the narrative is invalidated before the trend is clear, premature rate cuts could trigger inflation surprises, forcing the Fed to tighten more aggressively, further distorting US debt supply and demand, and making fiscal deficit reduction harder. This would be very negative for dollar assets. In the near future, global market trading will likely revolve around these two paths.

2. Implications for Chinese Assets

Based on the above analysis, the global Wash trade has four implications for Chinese assets:

First, the global rate-cutting cycle is nearing its end, and asset volatility is likely to increase. Looking at major economies: the Fed is expected to cut rates only twice in 2026; the ECB will mostly halt rate cuts; the Bank of Japan is likely to start raising rates; Canada, New Zealand, and Chile have already entered the late stage of rate cuts; Australia may restart rate hikes in February 2026. The volatility of major global assets will amplify with this monetary policy cycle shift, and Chinese markets should consider this global backdrop.

Second, focus on the US AI prosperity narrative, which will influence foreign capital inflows into China: If the US maintains the AI prosperity narrative and achieves stable inflation, combined with Wash’s guidance on reshaping monetary and fiscal boundaries, the dollar may rebound, and confidence in dollar assets could persist, delaying large-scale foreign capital inflows into Chinese assets. Conversely, if the US AI narrative is disproved, capital may rebalance and flow back into China. Currently, the AI prosperity narrative in the US remains intact.

Third, market attention will shift toward fundamentals, profitability, and dividend support: With global liquidity shifting, China’s valuation rebound in 2025, and the late timing of the 2026 Spring Festival, two key points will emerge after the Spring Festival: first, the end of the data vacuum period, with intensive economic data releases; second, the National Two Sessions on March 8, with policy signals becoming clearer and the “14th Five-Year Plan” outline, shifting market focus toward fundamentals, safety margins, corporate earnings, and dividends.

Fourth, the pricing logic of gold differs fundamentally from silver, copper, and Bitcoin: Gold’s valuation is above others, driven by the logic of global order reconstruction, so we remain strategically bullish on gold. Silver and copper, as new industrial materials, depend on actual demand; if supply and demand are predictable, their prices have an upper limit. Bitcoin’s valuation logic is different: it acts as a 2-3 times amplifier of market risk appetite, not a substitute for gold, and does not have the low correlation with major assets that gold does. Additionally, as a digital currency, it faces threats from quantum computing, which fundamentally differentiates its valuation logic from gold.

3. Core Viewpoints

In summary, we believe that who Wash is doesn’t matter; whether the AI prosperity narrative can turn into reality is what matters most. Currently, the core constraint of the US economy is on the supply side. If AI and robotics can unlock supply constraints, they will become key supports for the US economy. In contrast, China’s core constraint differs: our productivity is sufficient, and the main contradiction is on the demand side. If domestic policies to expand internal demand make substantive progress, that will be a key node for Chinese asset pricing.

Source: Yiyu Zhong

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Market risks exist; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their circumstances. Invest at your own risk.