Both countries need stable international financial conditions to sustain growth. Practical cooperation in key areas would protect the economic gains of both and reduce the cost of future disruptions for the rest of the world.
(Credit: Finance Magnates)
The risk of a selloff of AI-related assets, a surge in government bond yields and a cyberattack on a major payment system may seem unrelated, but in today’s financial markets, they can reinforce one another. That possibility gives the United States and China a shared interest in preventing financial stress from spreading.
In its October Global Financial Stability Report, the International Monetary Fund identified all three events as potential sources of disruption, even as economic growth and corporate earnings seem to indicate market resilience.
The connections matter. Falling AI valuations can erode wealth and make financing harder to obtain. Rising bond yields increase borrowing costs and reduce the value of investments whose returns lie far in the future, including AI projects. A payment outage can then prevent companies from allocating money with precision when they need it most. Together, these pressures could turn a market correction into a broader downturn in investment, employment and trade. America would face slower technology investment, higher financing costs and losses in household wealth. China would feel the effects through overseas demand, cross-border financing and trade. Economies that depend heavily on foreign capital could face even greater financing pressure.
Thus, Washington and Beijing both have good reason to strengthen early warnings, improve communication during market stress and protect the infrastructure that keeps money moving.
AI financing can amplify a downturn
The fulfillment of AI’s long-term promise requires a sound financial foundation. Spending on computing capacity and model development comes well before revenues from commercial applications. As investment increasingly depends on expectations of future earnings, disappointing business results can quickly threaten access to fresh funding.
The interconnected financing arrangements in the AI industry in the United States deserve particular attention. The IMF’s review of 14 publicly disclosed deals since 2023 covers roughly $300 billion in equity investment, $650 billion in debt financing and $1.4 trillion in future revenue commitments. Major technology companies finance AI firms that buy their computing capacity, cloud services or chips. Investors, lenders and suppliers therefore occupy overlapping roles.
What appears to be a spread of risk across companies and financial instruments may ultimately depend on cash flows from the same projects. If revenues fall short, a technology company could suffer both investment losses and weaker sales to the firms it backs. Lenders may pull back at the same time. Tighter financing would then slow construction and purchases, further weakening revenue prospects.
Such links can magnify an industry downturn, with effects extending far beyond American technology companies to global investment portfolios, orders for chips and equipment and related infrastructure projects. Understanding who depends on whose revenue is essential to judging how much risk the financing system can take.
Stress in Treasuries can spill over
U.S. Treasuries finance the federal government, anchor global asset pricing and serve as collateral throughout the financial system. When issuance increases and yields rise, the market’s ability to adjust smoothly depends on how investors fund their purchases and how much trading capacity dealers can provide.
Some hedge funds use short-term borrowing to buy Treasury securities and bonds while selling related futures, seeking to profit from the price difference. This strategy, known as the basis trade, can improve liquidity but depends heavily on continued access to funding. Federal Reserve research has identified several triggers for rapid unwinding—an unexpectedly wide gap between cash and futures prices, higher margin requirements or disrupted borrowing in the repo market, for example, where securities serve as collateral for short-term loans.
If many funds sell at once and dealers cannot absorb the securities, a price adjustment can become a liquidity squeeze. March 2020 exposed precisely this vulnerability: Investors rushed to raise cash and overwhelmed the Treasury market’s capacity to accommodate selling. A safe asset needs both reliable credit and a market in which it can be traded readily.
Falling Treasury prices reduce the amount investors can borrow against their collateral. Higher yields also raise the returns investors demand from other assets. Global institutions may sell holdings elsewhere to raise cash, transmitting pressure across borders and from bonds into stocks and credit markets.
For the U.S., orderly Treasury trading is central to government financing and the functioning of the financial system. For China and other economies, it affects international portfolios, dollar funding and external financial conditions. China’s local-currency bond market draws support from a substantial base of domestic banks and other institutional investors with relatively stable local-currency funding. But even with differences in market structure both countries are left with a strong interest in containing Treasury market stress and limiting spillover.
Cyberattack can spark liquidity crisis
Digital finance has made transactions faster and more efficient while deepening dependence on networks, software and cloud services. When many financial institutions use the same provider, an attack on that one can disrupt multiple companies at once.
The IMF highlights increasingly sophisticated cyberthreats as a potential source of market turmoil. An attack on a major financial institution, payment system or technology provider can interrupt trading, payments, deposit withdrawals and other essential services. A company with ample assets may still struggle to meet immediate obligations if it cannot settle transactions, transfer funds or access accounts. Such an operational disruption can precede a direct financial loss.
Uncertainty about the damage and timing of recovery can intensify the pressure. Firms may hold more cash, delay payments or reduce trading. Those individually reasonable decisions can collectively drain market liquidity. Even central bank support depends on functioning payment and settlement channels to reach the institutions that need it. Financial stability therefore requires attention to cybersecurity, oversight of technology providers and business continuity alongside adequate capital and liquidity.
Both countries have large digital financial markets and depend on cross-border payments to support trade and commerce. China’s continued development of its cross-border interbank payment system, or CIPS, with its safeguards and emergency procedures, supports the continuity of international payments in yuan. Professional exchanges on incident reporting, technology providers, and recovery procedures could strengthen each country’s resilience while reducing disruption to cross-border financial activity.
Agenda for cooperation
All three risks expose a common problem: Prudent decisions by individual institutions do not necessarily produce a macro-stable market. When everyone cuts positions, tightens lending or holds cash at the same time, each institution’s response can worsen conditions for the others. As major economies and leaders in AI development, the United States and China have much at stake. Cooperation should help authorities identify these interactions early and reduce the uncertainty that makes shocks harder to manage.
AI financing is one place to begin. Regulators and financial specialists should examine the common revenue sources behind equity stakes, loans and long-term purchase agreements. Sharing methods for stress-testing project cash flows would help identify who ultimately bears the risk and whether apparently diverse financing arrangements depend on the same commercial assumptions.
Treasury and bond market discussions should focus on issuance, collateral financing and leverage outside the financial system. Finance ministries, central banks and regulators could exchange experience in monitoring crowded positions and assess what simultaneous selling would do under stress. Earlier visibility into funding pressures would give authorities and market participants more time to respond.
Cybersecurity cooperation needs designated contacts, incident notification procedures and plans for restoring essential services. Subject to applicable data protection laws, the two countries could conduct joint exercises involving payment outages or failures at major service providers. Established channels would help prevent confusion over a technical disruption from turning into a broader loss of market confidence. Testing those channels before an emergency would also reveal gaps that are difficult to address once markets are already under pressure.
Multilateral institutions can extend this work. The upcoming Asia-Pacific Economic Cooperation (APEC) and G20 meetings offer opportunities to connect bilateral discussions with wider policy coordination. The Financial Stability Board has already issued recommendations on leverage in nonbank finance. The U.S. and China could support more comparable data and better monitoring of common asset holdings and interconnected financing. Information held by one jurisdiction would then contribute more effectively to an assessment of global vulnerabilities.
The United States and China take different positions in the financial system and could experience shocks differently. But both need stable international financial conditions to sustain growth. Practical cooperation on AI financing, bond markets and cybersecurity would protect the economic gains of both countries and reduce the cost of future disruptions for the rest of the world.
