The recent comments made by Stephen Jen, CEO of the UK hedge fund Eurizon SLJ Capital, have stirred significant discussions regarding the financial dynamics between China and the United States, particularly within the context of a potential shift in U.Sinterest ratesJen, known for his "Dollar Smile Theory," posited that a decrease in U.Sinterest rates could prompt Chinese companies to divest approximately $1 trillion in dollar-denominated assets, potentially leading to a 10% appreciation of the Renminbi (RMB).

At an economic symposium in Jackson Hole, Federal Reserve Chairman Jerome Powell hinted that the time for the U.Sto lower its policy rates had approachedThis statement has fueled the expectation that the federal interest rate may indeed drop in September, a prospect that Jen believes may present an opportunity for the RMB to gain value.

The logic behind this assertion is not entirely new; many financial analysts recognize that the Federal Reserve's interest rate cuts typically favor assets within the A-share market in China

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As the dollar depreciates, it is anticipated that capital will flow back into Chinese stocks, incentivized by the expected weaker dollar.

However, the current landscape of the U.Sstock market faces considerable challenges, which can be categorized into three main risks:

1. Bond Market Liquidity Drain: Lower interest rates generally enhance the value of U.STreasury bonds, subsequently drawing capital away from the stock market and tightening liquidity in equitiesNotably, Warren Buffett has stockpiled significant cash reserves, speculated to be redirected towards U.STreasury investments.
2. Dollar Depreciation: As the Federal Reserve cuts rates and narrows interest differentials, the dollar's value could diminishShould the dollar weaken, international investors might quickly pull their capital to avoid losses from currency fluctuations.
3. Stock Market Correction: The current high valuations of the U.S

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   stock market are largely speculative, hinging on anticipated profitability from technologies such as artificial intelligenceHowever, many argue that true commercial viability is still far from being realized.

Thus, should the Federal Reserve proceed with interest rate cuts, it is reasonable to expect capital flight from the dollarGiven the current global economic environment, it is challenging to find a valid reason for the A-share market to falter; even a modest rebound seems likely due to fundamental principles of capital movement.

While the prospect of $1 trillion returning to the Chinese economy is intriguing, the methodology behind this figure warrants scrutinyJen elaborated that since the onset of the pandemic, Chinese enterprises likely accrued over $2 trillion in overseas investments, characterized by interest rates exceeding those of RMB-denominated assets

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This surge in offshore investment correlates with the predicted decline in the attractiveness of dollar-denominated assets as the Federal Reserve cuts rates, potentially provoking the repatriation of an estimated $1 trillion.

Moreover, Jen forecasts that if oil prices continue to fall alongside an overvalued dollar, the pressures of the U.Sdual deficit alongside prospects of a soft landing may compel the Federal Reserve to implement rate cuts even more aggressively than anticipatedThe resultant situation could see the RMB appreciating significantly—between 5% to 10%—especially if the People’s Bank of China refrains from intervening in dollar liquidity dynamics.

However, the timing of this currency shift might not solely hinge on the Federal Reserve's actionsA deceleration in the dollar within a 'soft landing' scenario or a decline in U.Sinflation—without triggering a recession—may serve as a substantial catalyst for a RMB surge akin to the Japanese yen during times of crisis.

Nevertheless, the Chinese government has been cautious about a strong appreciation of the RMB, as it could jeopardize export competitiveness and the fragile economic recovery currently underway.

While I resonate with Jen's logic and perspectives on the market, I find myself questioning the stated figures

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Estimates from other financial firms suggest that the amount accumulated by Chinese exporters and multinational corporations falls short, with Macquarie Group estimating that over $500 billion was amassed since 2022, while Australia and New Zealand Banking Group posited an even lower figure of approximately $430 billion.

A closer examination reveals that in the past four years, China enjoyed a goods surplus of 19.12 trillion RMB and a service deficit of 2.38 trillion RMB—yielding a net gain of about 16.7 trillion RMB, slightly surpassing $2 trillionWhen evaluating outbound capital flows since early 2020, accumulated net outflows reach roughly $946.8 billion.

This period reflects a current account surplus of $1.33 trillion, with reserves maintaining at around $3.2 trillion, suggesting that there still lie substantial unconverted funds not classified under official categories, amounting to several hundred billion USD