Does the Fed’s Interest Rate Cut Mean the US Has Lost and China Has Won?

The United States Federal Reserve recently announced a rate cut, and many have taken this to mean the U.S. has lost the “financial war,” with some even proclaiming that “the U.S. has lost, and China has won.” But does this spell the end to the U.S.-China game? The reality is not quite so simple.

For one thing, we should not underestimate American strength. As the first superpower in history to hold sway over the military, political, financial and cultural spheres simultaneously, the United States’ dominion far exceeds that of the British Empire at its peak. “Hyperpower” rule such as this has almost reached its limits in modern civilization.

Just think: In the 45 years after World War II in 1946 to the collapse of the Soviet Union in 1991, the U.S. succeeded in neutralizing the Soviet Union to eventually become the world’s only superpower. Strictly speaking, the U.S.-China game only started 15 years ago.

The U.S.-China Game Is Far from Over

The U.S.-China game goes back to 2009, when it dawned on the U.S. that China’s rise would threaten its global dominance. It therefore put forward the “Pivot to Asia” strategy and implemented a series of political and economic inhibitory measures directed at China. In 2015, the U.S. resorted to financial means to stifle the Chinese stock market, but failed to do so; and in 2018, the Trump administration launched a trade war — followed by technological, biological and public opinion wars — in an attempt to shut China down completely. But even under such pressure, not only did China fail to fall, it actually made breakthroughs in key technologies such as semiconductor chips.

Can American Financial Tactics Still Prove Effective?

Facing defeat on the trade and technological fronts, the United States’ last resort is financial war. In March 2022, the Fed began raising interest rates, hoping to hit out at the Chinese economy and draw capital back to the U.S. Indeed, this move dealt China a significant blow and slowed its economic growth for a time. But with the onset of U.S. interest rate cuts, many people see America’s financial war as a failure.

But can we really say that the struggle between the U.S. and China is over? Clearly not. While hot money may flow back into the Chinese market after the Fed’s interest rate cuts, the U.S. is not going to sit idly by: We can expect that the U.S. will eliminate such funds by engineering a financial crisis, or that it will avail itself of other ways to prevent capital from entering China.

Where the threat of war is concerned, and stock market crashes aside, creating regional conflicts is another more extreme measure that the U.S. has at its disposal. War in East Asia would naturally stymie the flow of capital into China — and this is not alarmist talk: The U.S. has repeatedly used war to safeguard its interests around the world. While the possibility of a head-on military conflict between the U.S. and China is unlikely, who can guarantee that some other form of conflict won’t occur? After all, American history tells us that, when it comes to protecting its own interests, the U.S. knows almost no limits.

How Should Investors Respond?

Faced with such a complex international situation, investors must remain vigilant, as the U.S. may be unable to use financial means for now, but it will not readily give up its efforts to hamstring China. From trade wars to financial wars to potential regional conflicts, every step could impact the global markets. It will be particularly important for the ordinary investor to act with caution and pay close attention to international developments.

History shows us that it took more than 20 years for the dollar to dethrone the pound sterling as the world’s currency. The game between the U.S. and China could likewise be a long one in the making.

Although the markets seem to have heaved a sigh of relief at the U.S. interest rate cuts for the short term, the way ahead is still full of uncertainty. The second half of the U.S.-China game is only just beginning, and investors should not take it lightly.

The world will not know peace any time soon, so what we need to do is remain calm and assess the situation, so that we can protect our own wealth in this game of great powers.