The liquidity map points to China

What happened

China has increased significantly its OMO liquidity injections (Open Market Operations, i.e. liquidity financing to the financial sector) in July, increasing its outstanding balance from less than CNY3'000bn (~US$415bn) to more than CNY5'000bn (~US$700bn) as reported by the PBoC. This stands at the highest levels year-to-date and is just the latest reading in a well defined uptrend.

The PBoC has been increasing its overall liquidity injections since the beginning of 2025. But after a few erratic moves, it appears to have become way more resolute. The scale of the recent burst of liquidity is dramatic to say the least: according to data compiled by CrossBorder Capital that takes into account other liquidity levers beyond OMOs, over the past six months the PBoC has injected around CNY10tn (US$1.5tn) into Chinese money markets.

Impact on our Investment Case

Government spending trumps interest rates

We have been arguing that fiscal policy will trump monetary. In other words, the need by governments to borrow money and fund deficits by issuing bonds has reached such a proportion that Central Banks have little choice in their monetary policy decision: they need to ensure that government debt gets financed. But when central banks add liquidity (i.e. create new money) to help governments borrow, that extra money doesn't just sit in bonds. Liquidity is fungible on a worldwide basis, and like water finding its level, it spreads throughout the entire investment world – stocks, cryptos, commodities, and other assets, all benefit, in a form or another, from this flood of cash.

We are experiencing a risk-on, melt-up situation across global markets that is mainly led by a surge in global liquidity. It is thus key to monitor this metric and assess which are the sources of said liquidity and how sustainable the flow can be.

China Leads the Way

Right now, China is pumping the most money into global markets. They can afford to do this because:

• They have a surplus NIIP (Net International investment position), or in other terms more investments abroad than foreigners have in China, which means a healthy financial position.
• Very low bond yields, leaving ample room of maneuver.

Even more importantly, it is also part of China's stated policy: transitioning towards a consumption-led domestic economy requires time and money. Thus this has the makings of a lasting trend.

The US has a tough act to follow

This year, the American contribution to global liquidity came through the rundown of the TGA (Treasury General Account, from ~US$840bn to a low of ~US$300bn in July, meaning more than US$500bn were released) and the weakening of the USD (the Dollar Index, DXY, is down ~10% YTD). This has allowed the FED to continue officially running its QT program, while maintaining sufficient bank liquidty reserves in the system (just above the safe level estimated at ~US$3-3.3tn). The bigger risk at the moment is that the potential TGA rebuild to the official target balance of US$850bn would tighten dollar liquidity. The ~US$500bn drain would impact bank reserves levels pushing them well below the "safe" threshold. In this framework, the active Treasury buybacks to remove stale or ‘off-the-run’ securities, hints about the ending of banks’ SLR (Supplementary Liquidity Ratio), and the sponsorship of stable coin as future purchasers of Treasuries, all point to ensure US liquidity is not affected.

Asymmetric risk/reward

The current FED stance can hardly be defined as a convincing liquidity expansion policy, able to match China's one. Again, this is perfectly understandable, as the FED cannot publicly afford a liquidity expansion stance: US Treasuries yields are already at 20 years high, with the 30 year bond flirting with the 5% level, and there is vocal political pressure to cut rates and reduce the interest cost for the Treasury. Additionally, with continued issuance needed to finance the increasing federal deficits, the FED also needs to preserve Treasuries' attractiveness for investors.Earlier this year jitters in the Treasuries market ignited the so-called "repatriation trade", leading to a sharp correction in US markets across the board.

While at the time the main beneficiary, especially in relative terms, were European markets, the situation has evolved since. We consider that, from a risk adjusted point of view, China is the one now set to benefit from eventual American jitters. Europe is the last comer to the fiscal dominance game, and for all the announcements, there is still very little evidence of fiscal spending. Additionally, the recent agreement signed with the US at the latest tariffs' negotiation round appear not to be particularly favorable for the Old Continent. Compare this to how China is increasingly showing signs of economic recovery, its fiscal policy has been set and is being steadily implemented, and the PBoC is playing the supportive role it is required.

Our Takeaway

Although not the only variable, markets are currently being mainly driven by liquidity. As a consequence, we believe that, all else being equal, it is best to invest closest to the main source of such liquidity. And at the moment, the indication is quite clear that China stands well above the rest.

This does not mean that China is the only place to invest into, but adding exposure to Chinese equities is something we have been steadily implementing across our strategies over the recent past. This fits our broader investment strategy of focusing on beneficiaries of deglobalization, fiscal dominance, and technological self-sufficiency.

Within the broader Chinese market, we particularly favor technology companies benefiting from renewed government support (the "Made in China 2025" policy) and still attractive valuations (trailing P/E of ~20x for the Hang Seng Tech index vs ~35x for the Nasdaq 100). Please note that earlier this year we've also launched a dedicated China tech-strategy to capitalize on this opportunity.