When things go bad, you want to be in China, says Gavekal’s Louis-Vincent Gave

The 10-year Chinese government bond yields below 1.7%, versus 4.8% for the 10-year U.S. Treasury, as investors weigh China as a potential safe haven amid geopolitical turmoil and concern over $40 trillion in U.S. national debt. China’s weak growth, retail sales and investment remain major constraints, with depressed consumer and business confidence limiting the bullish case. Geoeconomic tensions are rising as U.S.-Canada tariffs take effect, while oil prices remain materially above early-year levels following the Iran war, sustaining energy-security risks and potentially accelerating renewable-energy demand.

Analysis

The relevant cross-asset signal is not a binary U.S.-to-China allocation shift but a widening premium for duration hedges and assets insulated from Western fiscal term-premium risk. Chinese sovereign bonds offer low nominal carry; for USD-based investors, prospective returns are dominated by CNY depreciation risk, capital-mobility constraints, and whether deflation migrates into credit stress. A sustained rise in U.S. term premium would favor intermediate-duration Treasuries only after yields overshoot, while pressuring long-duration equities, leveraged real estate, and private-credit marks.

Elevated energy volatility creates a broader margin dispersion than a simple bullish call on oil: upstream producers monetize the shock immediately, while transport, chemicals, consumer staples, and Asian import-dependent manufacturers absorb it with a lag. The 1-3 month catalyst is refinery utilization, inventory draws, and any disruption to Middle East shipping; the 6-18 month consequence is accelerated procurement of grid equipment, LNG infrastructure, and domestic energy security. Renewable beneficiaries are selective: developers remain rate-sensitive, whereas grid and power-equipment suppliers have more direct exposure to capex resilience.

The contrarian view is that markets may be overpricing China as an uncorrelated refuge. A confidence rebound would likely require property/household-policy transmission rather than additional liquidity, and a weaker CNY could erase the bond-return advantage for foreign holders. Conversely, if U.S. fiscal concerns push the 10-year yield materially higher without stronger nominal growth, the more attractive expression is a duration hedge rather than a broad China-equity long.

Key Decisions for Investors

• Maintain a tactical long XLE / short JETS pair over the next 1-3 months. The trade captures energy-price margin dispersion without requiring a further outright oil spike; target 8-12% relative upside, with a stop if Brent closes below its pre-disruption range for two consecutive weeks or airline fuel-cost guidance remains unchanged.
• Use a staged long IEF or TLT position only following a further yield backup driven by term premium rather than stronger payrolls/inflation. This is a 3-6 month convex hedge to risk-off growth deterioration; invalidate if core inflation reaccelerates for two consecutive releases or the Fed signals renewed tightening.
• Prefer grid and electrical-equipment exposure through ETN, PWR, and FSLR over broad TAN for a 6-18 month energy-security allocation. Equipment backlog and booked-margin growth, rather than renewable-project announcements, should be the confirmation metric; reduce if order growth decelerates materially or financing costs rise further.
• Do not initiate a broad long China-equity or China-bond allocation solely on safe-haven framing. Put CBON and MCHI on watch for a policy catalyst tied to household/property demand and stable CNY; absent those conditions, the low carry and FX asymmetry do not offer compelling USD risk-adjusted return.