Wealth accumulation fundamentally hinges on aligning with prevailing trends. For both individuals and institutions, prosperity is a product of its era. If capitalizing on trends in the past meant buying property early and often, then the most rational approach for the present and future involves prudent household asset allocation. More precisely, this means transitioning from traditional real estate-centric portfolios to more diversified and professional financial asset allocation.
Consequently, we have initiated a series of internal reports titled the "Household Asset Allocation Manual" within our membership system. This series aims to explain practical methods for household asset allocation from a family and individual perspective, using accessible language. We hope this proves valuable to members seeking asset allocation guidance or those working in related wealth management fields.
At the outset of this series, we focus on the core logic of asset allocation tailored to Chinese households. Our previous session covered cyclical asset rotation for A-shares, bonds, money markets, gold, and Hong Kong stocks. Today, we continue by examining the rotation logic for several other asset classes.
5. Cyclical Rotation
(6) The US Dollar
From a long-term perspective, the USD to RMB exchange rate shows no clear, sustained trend of appreciation or depreciation. Over the past decade-plus, it has generally fluctuated with an appreciation bias. However, the next decade may see fluctuations with a depreciation bias. Purely from an exchange rate standpoint, the cost-effectiveness of holding US dollars has diminished.
From an economic growth angle, China's economy remains in a medium-to-high growth phase, whereas the US, after the waning of massive stimulus benefits, is gradually returning to a lower growth trajectory.
From a trade perspective, despite rising protectionism in developed economies like the US, China remains the world's most competitive exporter. This is primarily driven by technological innovation fueling industrial upgrading and the release of a second wave of export dividends, suggesting China may maintain a long-term trade surplus with the US.
Financially, the inverted interest rate differential between China and the US and the resulting capital outflow pressures were significant drivers of RMB depreciation in recent years. However, over the long term, high US interest rates are unlikely to be the norm, and China's low rates have limited room to decline further, suggesting these marginal pressures may weaken.
From a medium-term cycle view, exchange rate fluctuations are an exceptionally complex phenomenon, requiring consideration of both internal and external factors, as well as market dynamics and policy.
First, examine the fundamentals, primarily determined by the relative strength of the US and Chinese economic cycles and the resulting interest rate differential. Generally, during China's strongest economic expansion phases, robust growth leads to passive monetary tightening, rising interest rates, a widening interest rate differential with the US, and a tendency for RMB appreciation. For instance, the two appreciation cycles over the past decade occurred during such phases: one in 2017 and another from late 2020 to the first half of 2021, periods when Chinese interest rates were significantly higher than US rates.
Conversely, when China's economy is relatively weak and the US economy is relatively strong, leading to a narrowing or inversion of the interest rate differential, the RMB tends to depreciate. For example, in 2022, US rate hikes and Chinese rate cuts, coupled with unprecedented US economic prosperity from stimulus and a Chinese economic adjustment period, caused a rapid decline and inversion of the interest rate differential, followed by significant RMB depreciation.
Second, consider valuation. The RMB exchange rate is not fully market-driven. Beyond fundamentals, the level of the real effective exchange rate (REER) against a basket of currencies must be considered. This influences policy stance and flexibility, thereby determining the medium-term scope for appreciation or depreciation.
When fundamentals point to depreciation and the RMB REER is significantly overvalued, depreciation pressure intensifies. For instance, in early 2022, the RMB REER hit a record high while fundamentals supported depreciation, so policymakers were likely amenable to depreciation, allowing for greater downward room.
Conversely, when fundamentals point to appreciation or minimal depreciation pressure and the RMB REER is significantly undervalued, appreciation pressure strengthens. For example, in 2025, the RMB REER reached a new low while fundamental depreciation pressures eased significantly, initiating the current appreciation cycle, with the USD/RMB rate retreating from 7.3 to below 6.8.
(7) US Treasuries
Cyclical rotation for overseas assets must consider not only intrinsic value but also the USD exchange rate, especially for fixed-income assets like US Treasuries. Given their inherently low yields and low volatility, significant exchange rate fluctuations could easily outweigh the asset's own value changes. Of course, for those earning and spending in USD, currency conversion is not a concern.
Setting aside exchange rate volatility, US Treasuries are primarily driven by the US economic cycle and the resulting inflation and interest rate cycles.
From a long-term perspective, US Treasuries have transitioned from a long bull market to a volatile, bearish-leaning cycle. High interest rates may persist for a considerable period, with potential for a bond bear market crisis akin to the 1970s stagflation era.
From the end of 1970s stagflation until the pandemic in 2020, US Treasuries experienced a 40-year super bull market, with the 10-year yield falling from over 15% to a historic low around 0.5%. However, the long bull market ended post-2020 as yields bottomed and began rising, significantly diminishing the allocation value of US long-term bonds.
The core reason is that inflation has been ignited, and the era of prolonged, massive monetary easing has reached its limit.
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