Chip war escalates as China dumps US Treasuries and AI bubble shows signs of strain
Sean Foo, market analyst, joins Glenn Diesen to discuss the US-China economic war, the chip race, AI market valuations, and where investors can find safety.
Summary
Sean Foo, a market analyst specialising in China and global markets, joins Glenn Diesen to break down the accelerating US-China economic decoupling. He argues that China is effectively done accumulating US Treasuries, having dumped around $41 billion in the past month, and is actively ring-fencing its capital flows — including imposing capital controls on the approximately $50 trillion in domestic savings to prevent dispersal through Hong Kong brokers into western economies — as part of a broader decoupling from the US financial system. He contends that the US strategy of cutting China off from advanced semiconductors has backfired, forcing Chinese innovation and costing Nvidia half its global market. He also warns that the AI investment bubble in the US is increasingly fragile, with sticky high interest rates, ballooning national debt approaching $40 trillion, and inflationary pressure from elevated energy prices all converging. He sees a period of forced money-printing by the Federal Reserve as increasingly likely, and advises investors to diversify broadly rather than concentrate in any single asset class.
Key Takeaways
FULL TRANSCRIPT
Introduction and China's exit from US Treasuries
Glenn Diesen: Welcome back. We are joined today by Sean Foo, market analyst and expert on China. Thank you very much for coming back on the program. A lot has happened since last time we spoke. Besides the actual wars being fought against Russia and also in Iran, we forget that there is also the ongoing economic war between the United States and China. I want to start off by asking how you view this economic war going, especially with focus on US Treasuries. Is China still looking at further investment, or do you think they're going to essentially begin to reduce their position in this market?
Sean Foo: I think more or less China is done with US Treasuries. In the last month they dumped around $40 to $41 billion, and going forward I think China doesn't really see a point in coupling their economies too tightly with the United States. If we look at the entire debacle over the last 60 to 90 days, especially when we talk about the war in Iran, at the grand scheme of things it is in a way an effort to contain the Chinese economy. If we look at the flows of oil from the Strait of Hormuz all the way to China, China does buy a lot of Iranian oil and right now those flows have been compromised. Obviously that isn't really a big problem for China because 90 to 95% of their power generation is not from oil and gas — it's from renewables and from coal — and most of the supply chains China controls themselves. But it does show a concerted effort on Washington's part to really use the US military and other sanctions and geopolitical schemes to corner China's economy.
Now if we look at what happened during the recent Trump-Xi summit, when Trump brought his delegation including his family to China, to Beijing, to talk with President Xi, the grand idea was basically to throw the heads of Iran and Venezuela on the floor like a conquering hero in order to intimidate the Chinese — saying, hey, we managed to do X, Y, and Z, we managed to pressure the Iranians, so it's time for you to comply. But that didn't happen at all. We could see a lot of supplication from the Trump administration side. They really didn't push the Chinese on anything, and they even accepted phrases from the Chinese saying that yeah, we'll look into rare earths — but chances are they won't. They'll just keep their hands on the tap. I don't think China is going to really recouple themselves with the United States going forward, least of all buying more Treasuries.
Energy prices, inflation, and the limits of US self-sufficiency
Glenn Diesen: In the United States, there are many who think that increasing energy prices will essentially benefit the United States, as it's considered self-sufficient in at least some areas and also an exporter. So the price will go up, they may have greater income, and also countries will be forced to spend more on energy in US dollars. And as you said, many are hoping this will also slow down the Chinese economy. How do you assess the American side of this? Do you think this would actually work — that it would end up benefiting the United States? Because the US is part of the world. I know they seem like they're trying to build up and insulate themselves, build up some western hemisphere or exclusive region of security. But to what extent do you think this is possible?
Sean Foo: I don't think it's really possible at all. Let's just take a look at the example you just gave. It's true that because of the constricted oil flows from the Strait of Hormuz, a lot of countries are being forced to buy more American oil. And because oil is a global market, the price of oil goes up for WTI crude as well. So if you look at all the stock prices of the big companies from Chevron to Exxon, they've been exploding higher and higher over the last 90 days. But the big problem with that is oil is a global market, so prices for everyday Americans also go up.
If we look at the inflation numbers over the last two months, it has been absolutely alarming. Inflation has gone from 2.4%, it went up two months ago to 2.8%, and now it's around 3.8%. So there is a clear trend of inflation going up. No doubt a lot of the big oil companies are going to rake it in, but other parts of the real economy are going to suffer. Americans are now paying between $500 to maybe $1,000 more a year just for their gas bills. So sooner or later, consumption is going to crack. Something has to give. They're not going to spend perhaps in restaurants. They're going to buy less from Walmart. They're going to slash their discretionary spending.
A lot of cracks are already being formed in the US economy, and because of higher energy prices, inflation goes up and bond yields are going to stay high as well. So if we look at the other side of the equation, where Trump is trying desperately to tout the new AI economy and keep the bubble afloat — they're trying to build fields of data centers — well, you can only keep doing that to a certain degree. Money is finite. And if interest rates continue to go up or at least stay stubbornly high, it's going to backfire on the US economy sooner or later.
Right now we're looking at the stock market at bubbish valuations. Trump keeps telling us the war is on, the war is off — they're going to discuss something with Iran, or no, now they want them to give up nuclear weapons and sign it on paper. Everyone is really in a big state of confusion, and I don't think the US can isolate themselves. In fact, they're just stacking more cards on this house of cards.
The chip war and Huawei's semiconductor breakthrough
Glenn Diesen: Trump has become the boy who cried wolf. Every day it's either Iran will be bombed again or we're so close to a deal. It's a bit strange that the markets still respond to his statements, because they seem not very credible and very evidently aimed towards managing or influencing the markets. While the financial markets are in a very difficult position, a key aspect of this economic war is still the tech fight — the chip wars, if we can call it that. The initial assumption was that if they cut off China from American chips, then somehow all their major tech giants would begin to stumble, either stagnate or decline. Obviously this didn't play out. Where do we stand today in this chip war?
Sean Foo: Most recently, Huawei revealed a breakthrough and innovation. They are now beginning to make chips that, at least by 2031, will be at a scale where they can compete with Nvidia and TSMC. And this is what happens when you push the Chinese into a corner — you force them to innovate. They have no choice. Either they innovate or they lose the AI race.
Over the last one to two years we have seen Chinese engineers come up with very interesting solutions to the tech race. When Nvidia and Trump deny the most powerful AI chips to China, the first solution was basically to create a lower-end version and just string a bunch of chips together. Instead of using maybe 100 Nvidia chips, use a thousand Huawei chips. And considering the energy buildout in China, energy prices are a quarter of those in the United States — at least 50% cheaper. If we look at the entire AI race, the base layer is always energy. As long as you have sufficient and cheap enough energy, everything else will follow. Your manufacturing gets cheaper. You can make more mistakes. You can undergo more trial and error and eventually get up to better innovation through brute force. This is why I think the chip race is starting to backfire.
When Jensen Huang of Nvidia went all the way to China, I think he basically gave up. He wanted the administration to just allow China to buy the high-end chips, because China isn't even importing much of the lower-end chips anymore. China already understands that they are going to leapfrog this technology sooner or later — why would they invite Nvidia to get a foothold into the market? Because of that, 50% of the global market is now effectively shut away from the United States. Even on the visit itself, Beijing banned an RTX Nvidia gaming chip that some companies use for AI as well, and that was during the same trip where Trump went to visit President Xi. You can already see a bit of ring-fencing going on in plain sight.
I won't say the US has lost the AI war completely, but they're going to have to find a way to desperately make up the shortfall when they lose 50% of the market. Maybe that's why over the last week Jensen Huang came out at a convention holding two laptops, telling the whole world that Nvidia is going to go into the personal laptop business — because where else can you find the revenue when half of the market is gone?
The AI bubble and Gulf state capital flows
Glenn Diesen: It's kind of strange, if you look back — it was the United States that decided to a large extent to cut itself off from the Chinese market. If you want to lead innovation, you do need some revenue stream, and if there's no money coming in, how can you continue to fuel this? I guess this is where there's been a lot of focus on the argument that the AI market in the United States is in a bubble, that the financing especially is not sustainable. It appears this has taken a further hit from the Middle East, because a lot of the Gulf states can't sell all their energy, and they used to pump a lot of money into not just US Treasuries but AI in America as well. Do you see this having an effect, or do you think it's exaggerated?
Sean Foo: I think it does have a bit of an effect, and it really depends on how Trump ends the war. Does he end it in a way where the Gulf allies understand they're not going to get pounded by Iran forever, and where they realize that at least the United States is not treating them completely like trash? Because if the United States continues this and the war goes on indefinitely, we are going to see more revolt in the alliances.
So far we have already seen the UAE break away from OPEC, and that really shows you that once the war ends, these countries need a lot of revenue to rebuild their shattered economies. Tourism is down. A lot of the oil facilities have been hit. If I'm not wrong, an airport in Kuwait was hammered a few days ago. Saudi Arabia is desperately shifting their oil flows from the Strait of Hormuz all the way to the Red Sea, and the Bab-el-Mandeb Strait is always under the constant threat of the Houthis. Because of that, I think it really depends on how Trump manages to settle the war. Can they come together to make some kind of accord that pleases both the Iranians and the Gulf allies? I think that's going to be hard.
Going forward, I don't think the Gulf allies are going to place all their eggs in the same US basket. We were talking about how flows from the Gulf go into US stocks and bonds — I think that is going to be compromised as well. Over the last three days we have seen quite a few announcements from Scott Bessent, the Treasury Secretary, about how Iranian assets have been confiscated. He bragged about confiscating around $1 billion worth of Iranian crypto. Now this is quite alarming, because a lot of us come with the concept that money — if you buy Bitcoin, if you buy cryptocurrencies — is somewhere out in the ether, supposed to be anonymous, and you can transfer it from country A to country B. But it has been shown that the US manages to trace it on the public blockchain. They can go to the exchanges and just freeze it or take it away.
So right now there's a lot of uncertainty about where the Gulf allies are going to put their money. One good option — the traditional option — will be to buy gold, just ship the gold to your country and store it in bulk. There are other options where you can invest into so-called adversary economies of the US. Obviously China is one where you'll be at least protected within the Chinese sphere of influence. So it's about spreading your eggs across the basket, and I don't think that would be good for US assets in general.
Military overstretch and its economic consequences
Glenn Diesen: This is what happens in economic wars — there's a diminishing trust and people have to diversify. It's quite extraordinary how short a period of time it took us to get here, where the United States first starts to seize and well, steal sovereign assets of countries, steal gold as we've seen, hijack ships, and now they're getting into crypto and seizing that as well. Countries obviously have to react to this. But the Gulf states — the lesson that US security arrangements are linked to economic links with the United States is not a new thing for them. The fact that they have been protected by the US is a large reason why they sell their oil in dollars as opposed to, for example, gold or the Chinese yuan. But it's also a reason why they invest a lot of this money in the United States.
However, what we've seen in the Iran war is that the Americans used a lot of their weapons up in Ukraine, so they didn't have enough to fight Iran. For this reason they had to begin to divert weapons that were supposed to go to Europe to fight Russia. Then they also had to divert weapons out of East Asia, especially South Korea, and send them down to the Gulf States — and even there they prioritized Israel. So this military overstretch must be sending some signals to Europeans, the Gulf States, and East Asia that the Americans can't really protect everyone anymore. How do you see that translating into economics? Does it mean that the South Koreans will begin to decouple a bit from the American economy, and the Europeans as well — or are we not quite there yet?
Sean Foo: I think we're not quite there yet. There's still a lot of partnerships going on between the Japanese, the Koreans, and the United States. As we can see, there's now a lot of concerted effort by the US and all these economies to invest between each other. Most recently we can also see Nvidia investing more money into TSMC, or at least into Taiwan. So that in a form is a kind of technological shield — using money to shield their economies at least from the perceived threat of China.
I think going forward we are going to see a lot of money printing and a lot of debt going on when it comes to rearmaments. At the end of the day, all these economies — whether the Koreans, whether the Japanese — they already can see in real time that they cannot rely solely on the American security umbrella. As you just pointed out, a lot of missiles and weapon systems have been shifted to other active fronts, whether that be Ukraine or the Iranian front. So all these countries really know, and there is speculation, that they will have to step up and borrow more money in order to build out those weapons. I think we are going to enter a very dangerous age of money printing where currencies lose even more value in order to build out the weapons.
And even today, there's still the perceived threat that China is going to invade any country at any time in the Indo-Pacific. So this constant fear-mongering, I think, is going to push the US and their allies to just rearm even faster.
The $40 trillion debt trap and the Federal Reserve's dilemma
Glenn Diesen: I get the same impression — especially the Europeans now, and yeah, everyone wants to arm themselves to the teeth. The Americans, I'm not sure if it's passed yet, but they want to spend one and a half trillion on the military. It's a lot of weapons, and it can fuel many industries during this kind of military buildup. There's often technological innovation, but no one in the West — or in the East as well, countries like Japan — are really suited for it financially. They're all ridden with debt and inflation is already high. The United States is ticking now towards a $40 trillion debt. That's a big hole. To what extent do you think this can continue? Because if an economic crisis begins to unfold, banks would be threatened. What weapons do they have now to essentially restore their markets or stabilize them? Because if they increase the interest rate, they can't service $40 trillion in debt. If they reduce the interest rate, they will further destroy their currencies and more countries might de-dollarize. What can we expect in terms of financial stability moving forward?
Sean Foo: I think true market financial stability is now more or less officially gone. We are now in a new world where low interest rates are more or less finished. Interest rates have been staying sticky — they have been going higher. And as you said, the $40 trillion debt is just going to balloon even worse. A lot of market participants are still hoping for rate cuts by the end of this year, but if we look at what's happening with the Federal Reserve, there's a very good chance they will actually hike in 2027. So this is going to make the debt situation even worse.
The United States is already trapped in a quandary. If they decide to issue more bonds in order to pay off the deficits, interest rates and yields are going to go even higher, and that will push the national debt off a cliff. However, if they decide to cut rates in order to ease the debt burden, inflation will go up and the markets will punish them with even higher rates down the road. So everything just leads down to the central bank saving the entire system.
As you said, the US economy cannot afford a freeze of the money supply where everything suddenly slows down — no one is spending, the banks are not lending, the entire economy as we know it grinds to a halt. This points to the Fed either suddenly or gradually buying bonds to flood the market with cash and liquidity. So we are going to move towards a period where either a systemic crisis happens — for example, the AI bubble bursts, or the semiconductor bubble implodes, or somehow everyone loses faith because Trump's war on Iran has taken too long and confidence collapses — and then the Fed will come in and tell the whole world, hey, we are printing three trillion. Or if that doesn't happen, it'll be a slow print where hundreds of billions of dollars a year will be pumped into the situation. And if we look back all the way to December, over the last six or seven months, the Fed has been printing money into the system already.
China and Russia consolidating, and the multipolar shift
Glenn Diesen: I often think back to the global financial crisis in 2008, when there were essentially no alternatives to the United States. It was argued the dollar was the cleanest shirt in the hamper, and there wasn't much that could be done to diversify. But after that crisis, China began to develop its own transportation corridors, attempted to replace much of the US supply chains, developed its own development banks, and used more national currencies. I know that in the meeting you mentioned before between Xi and Trump, the hope by many was that they would reach some grand bargain. That wasn't achieved. However, after this meeting with Trump, President Putin came to Beijing as well, and they had this common declaration on the establishment of a multipolar world. Only three years ago, Putin and Xi were caught on an open mic saying that the world will change more than it has in a hundred years. So what do you think will be essentially the solution when US markets begin to melt down — when the tech war won't prevail and the dollar begins to struggle? What is China planning to do, and how will it get out of the splash zone? Because it doesn't look like they will behave the same way as they did back in the 2008 global financial crisis.
Sean Foo: I think we can see that China and Russia are both consolidating even closer together. We all remember back in 2022 and 2023 there was a joke and a meme that the US was pushing Russia closer to China because of all the sanctions and how the G7 hammered Russia — which is true. And Trump is doing the exact same mistake. He's pushing Russia closer to China as well, especially when it comes to oil flows and energy flows.
What China has been doing over the last three months, and just recently over the last three weeks, is slowly decoupling their entire financial economy from the US. Over the last two weeks China imposed even more capital controls on people's savings leaving China, going to Hong Kong and then from Hong Kong dispersing to other western economies. So China has had enough of that. They're clamping it down. They're telling the brokers: you're not going to allow mainland Chinese to send their money to you and then disperse it to the rest of the world. You can see China already starting to ring-fence their entire capital flows — how much money they have, the savings of their people, which is enormous, around over $50 trillion.
What China is doing is basically concentrating all their investments into either their allies or trying to make some headway into Europe if possible, but mainly consolidating around the BRICS allies — that includes Brazil and countries along the Belt and Road. China, I believe, has seen the devastation done in the Middle East. I'm not saying they're going to pull out all their investments there, but I think they're going to concentrate more in the Asian region, which is exactly where they should be. So we can expect more cooperation with Russia, more cooperation with the Central Asian states, and China will definitely work more together with India as well and Southeast Asia. I think at this point China understands that they have to decouple from the US in quite a big way.
Europe's structural trap and China's hedging strategy
Glenn Diesen: I think a big consequence of the war in the Gulf is also that many countries are worried that the Gulf states might actually go under if this war escalates. But even if it doesn't, it will take a long time for these countries to essentially go back to where they used to be, if that can even be achieved. So there seems to have been a huge capital flow out of the Gulf States heading towards East Asia — to places like Singapore and other areas. But on China trying to decouple from the US, do you see it also limiting its position in Europe? Because the Europeans began to a large extent to repeat the American talking points — they were very worried about what they call Chinese overcapacity. It's a fantastic concept. No one's talking about America's digital overcapacity, or French wine overcapacity, or Italian fashion overcapacity. But anyway, this is a way of saying let's try to diminish the Chinese market. It sounds very defensive. How do you think China will respond to this? Because the European markets are already in a very difficult position — by cutting themselves off from Russian energy first, and now being forced to have less contact with the Gulf States, energy prices go through the roof and they are beginning to de-industrialize in a big way. To what extent is Europe still an attractive market, or does that fall within the decoupling? If China is shifting to the BRICS states for investments, does that also entail reducing its position in Europe?
Sean Foo: I think it does entail China reducing their position in Europe sooner or later if the EU decides to ramp up the trade war with China. China will have no choice but to enter other markets, whether that's in BRICS, Southeast Asia, or even Africa.
As you mentioned, I think Europe is really lost — they're lost in the Twilight Zone. They have lost cheap Russian energy. They have lost flows from the Middle East. And I don't see any way for them to really revive their economy and make their own manufacturing attractive unless they do a radical shift of their energy policies. A very simple one could be just to dismantle some of their green policies or start reviving some of the nuclear plants. It's as simple as that, because they only have a few options and most of them they find distasteful. Running back to Putin for natural gas — von der Leyen herself has said it's distasteful. Asking the Chinese for solar panels — well, you've tariffed them, so you've just raised the cost of production for yourself. So the Europeans are left with very few options.
Now for the Chinese, I don't think they really want to decouple from the EU, because Europe has always been seen as one of the other big kingdoms around — apart from the US and China itself. I think they do see that there could be eventual hope for the EU, but how long it will take is a very big question. So I think China is just going around hedging their bets. I don't think China really wants to decouple from the EU. There's still quite a bit of consumer base there, and there are still some EU countries that are relatively rich. I don't think the Chinese want to just cut Europe off forever.
Where to invest amid global market disruption
Glenn Diesen: Well, it's not too late to change course, I guess. I'm waiting as well for the European leaders to stop doubling down on failed policies and pursue some kind of course correction. We're not quite there yet, but perhaps when the pain begins to ramp up, they will change course. That takes me to my last question though. Where do you think the good money is going these days? Because we're seeing such massive disruptions in international markets, and the geoeconomic centre of power is shifting further to the east. Where do people invest? I know you're very big on gold and silver and metals, but where else do people essentially put their money these days in order to preserve their wealth and ideally grow as well?
Sean Foo: I think now is one of the most difficult eras to really invest. Everything looks like it's in a big bubble — whether that is the US stock market, whether that is in tech stocks. We see a lot of semiconductor names like Micron, SK Hynix, and Samsung all going up. So I think now should be a time where people really consider the idea of diversification. I can't sit here and tell you that gold is going to go up in a straight line. I can't sit here and tell you that the S&P or even Chinese stocks are going up in straight lines, because there's a lot of big risk coming down in the next two to four months.
We just need to look at the oil crisis from the Strait of Hormuz. Everyone thinks the crisis is done, but there's a very big backlog of oil shortages coming that's going to register in July and August. And if there's such a low volume of oil, that means prices are going to go up. And the only way for that to reconcile is for people to consume less, and the price of oil will come down because people are consuming less — and that itself could really pop the bubble. But at the same time, if you buy bonds or leave your money in cash, you're going to get inflated away.
So I think this is really a time to spread your eggs across the basket. Having some gold is not bad. Having some international stocks isn't a worse idea either. Investing in China — the renminbi has been strong — that is also a great avenue. So I don't think I can really give anyone a clear answer right now. Personally, I am still buying gold every month, every quarter, because I see the long-term trajectory. But to put all your eggs in one single basket at this point in time, I think it's extremely risky.
Glenn Diesen: Well, this is the problem — all the markets are very integrated, and once something goes wrong, such as say the shutdown of the Strait of Hormuz, not only would it be energy but it would also be fertilizers, and with an energy crisis and food crisis you can expect the triggering of more conflicts in the world as well, which will impact the markets again. So with this many variables in play, with conflicts now where most of the great powers if not all of them are involved, it's very difficult to make any predictions at all.