US-China nationalism and xenophobia threaten economic stability

What appears on the surface as diplomatic friction between two superpowers is, in reality, a deeper shift with lasting structural consequences. The sharp rise in mutual distrust—underscored by surveys reporting 75–77% negative sentiment—is not a statistical anomaly. It’s the public face of a more entrenched decoupling that’s moving beyond policy and into the social fabric. While governments recalibrate their national security stances, something quieter—but more enduring—is breaking: trust, alignment, and the idea of mutual gain.

This isn’t merely about ideology or incompatible systems. The souring of US-China sentiment has become a force that distorts capital decisions, saps bilateral goodwill, and curtails global mobility. Once limited to tariffs and tech bans, competitive nationalism is now bleeding into university admissions, hiring pipelines, and consumer loyalty. What was framed as de-risking a few years ago has evolved into deliberate de-integration.

For sovereign wealth funds, regulatory bodies, and multinational boards, the reputational terrain has grown more precarious. In Washington, the scrutiny of Chinese-origin investments under CFIUS has broadened to encompass not just critical infrastructure, but adjacent sectors like AI and biotech. On the other side, Beijing’s “de-Americanization” rhetoric has morphed into procurement mandates and supply chain redirection—policy instruments with real economic bite.

That said, interdependence has not vanished. US fund managers remain exposed to Chinese consumer growth and asset flows via QFII and ETF channels. Meanwhile, Chinese students continue to underwrite a significant portion of US research output, particularly in STEM. These links are resilient—but they are not invincible. Sentiment may be harder to sanction, but it’s just as capable of severing ties.

Beneath the high-level summits and decoupling headlines, a more subtle breakdown is unfolding: the erosion of people-to-people confidence. This fracture poses a more persistent challenge than trade realignment or military posturing. States can shift alliances; populations require time—and trust—to follow.

For central banks in regions like Southeast Asia and the Gulf, this presents both a risk and an opportunity. As US-China volatility heightens, we may see a more assertive diversification of reserve holdings—not just for yield optimization, but for neutrality signaling. In a world where great power rivalry distorts capital flows, the middle ground becomes strategic terrain. That’s where Singapore, the UAE, and Japan now find themselves: not aligned, but anchored.

Diplomatic language may soften or intensify depending on the quarter, but the longer-term trajectory is clear. What we’re witnessing is not just rhetorical escalation—it’s a slow closure of imagination between two systems that once believed coexistence was possible. That belief is now brittle. And without it, even the most well-crafted policy won’t restore what deteriorating sentiment has already undone.