China: A Meaningless Trade “Truce”

Published on August 26, 2019
SGH Insight
Indeed, in a meeting on Saturday in Zhongnanhai that was attended by China’s highest leadership, President Xi Jinping, from what we understand, characterized the President’s latest round raising of the rate of tariffs on almost all Chinese imports as a sign of “hysteria” and “desperation.”

Trump, Xi said, cannot be allowed to bully China, and unless his administration was to fully accept Beijing’s three principles, there would be no bilateral agreement between the two countries.

The first of those principles, as a reminder, is the removal of all the Trump administration tariffs on Chinese exports to the US.

Having said that, after Friday’s fireworks, Xi added there was no need to immediately escalate again with further additional tariffs – at least not yet.

In the meantime, he instructed Premier Li to convene a meeting on Saturday afternoon to go over a series of further countermeasures against the US, if needed.
Market Validation
(Bloomberg 8/29/19)

China indicated that it wouldn’t immediately retaliate against the latest U.S. tariff increase announced by President Donald Trump last week, emphasizing the need to discuss ways to deescalate the trade war between the world’s two largest economies.

“China has ample means for retaliation, but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war,” Ministry of Commerce spokesman Gao Feng told reporters in Beijing on Thursday. “China is lodging solemn representations with the U.S. on the matter.”

Stocks across Asia pared losses and European stocks turned higher with U.S. equity futures as investors interpreted the comments as an olive branch from Beijing aimed at getting talks back on track.

Markets are cheering upbeat comments today by US President Donald Trump from the sidelines of the G7 summit in Biarritz, France, in which he is alleging a sudden U-turn from an embattled leadership in China eager now to strike a trade deal with the United States — just one weekend after a round of vicious tit-for-tats between the two sides.

*** Beyond a clear effort to lower the decibel level, however, there appears to be considerably less movement on any actual negotiation here than meets the eye, and a very short-term desire by both sides to avoid further immolation does not even remotely come close to a U-turn on what has turned into a full-on trade war between the US and China. Instead, at best, just a pause. ***

*** Indeed, from what we understand, China’s President Xi Jinping, on Saturday, the day after Friday’s angry salvoes, communicated a hardline negotiating message in Zhongnanhai to Premier Li Keqiang, and to the two highest level negotiators with the US, Vice Premier Liu He, and Minister of Commerce Zhong Shan. ***

*** That session appears to have been then followed by a meeting chaired by Premier Li, in which he tasked certain cabinet agencies to study, prepare and propose additional retaliatory measures that would, if needed, be taken against the United States. ***

Of course, as both sides are quick to say, talking is always better than not talking, even when that stance is characterized now in Beijing as “talking while fighting.” And there will be more talks, and more after those.

But that, really, is not new news.

Xi: Dig in and Prepare for Worse

By now, there has been considerable reporting of President Trump’s bombshell at Biarritz, in which he implied that Vice-Premier Liu He had directly picked up the phone late last night to ask his White House counterparts to come back to the negotiating table.

But events over the weekend in China do not seem to bear out any real change in Beijing’s negotiating stance at all.

Indeed, in a meeting on Saturday in Zhongnanhai that was attended by China’s highest leadership, President Xi Jinping, from what we understand, characterized the President’s latest round raising of the rate of tariffs on almost all Chinese imports as a sign of “hysteria” and “desperation.”

Trump, Xi said, cannot be allowed to bully China, and unless his administration was to fully accept Beijing’s three principles, there would be no bilateral agreement between the two countries.

The first of those principles, as a reminder, is the removal of all the Trump administration tariffs on Chinese exports to the US.

Having said that, after Friday’s fireworks, Xi added there was no need to immediately escalate again with further additional tariffs – at least not yet.

In the meantime, he instructed Premier Li to convene a meeting on Saturday afternoon to go over a series of further countermeasures against the US, if needed.

New Measures under Consideration

A series of new tariff and non-tariff countermeasures against the US, from what we understand, are being studied, which would include:

** A list of unreliable entities that will be announced in the near-future, and that will target mainly entities involved in the sale of arms to Taiwan and in the prohibition of the sale of parts to Huawei and other Chinese companies;

** Strict restrictions of rare earth exports to the US, including a requirement that all such exports be reported first to the NDRC (National Development and Reform Commission) and to the Ministry of Commerce for review and approval (see SGH 8/12/19, “China: Trade Retaliation Plans”);

** Strict restrictions on the export of other key strategic non-renewable resources to the US, eight of which must also be reported to the NDRC and MoC for review and approval;

** Finally, the NDRC, MoC, Ministry of Industry and Information Technology (MIIT), and Ministry of Agriculture have each been tasked to begin, today, to study the feasibility of raising tariffs by another 5% on all or part of US imports.

These four departments will report on the pros and cons of their proposals, but any final decision, of course, will ultimately reside with President Xi.

Friday – An Ominous Provocation?

Chinese sources stress that the US side was fully apprised that Beijing would take retaliatory measures if Trump was to proceed with the additional tariffs, as threatened, on September 1 and December 15, on about $300 billion of Chinese goods, and indeed we wrote as such. But as August went on, it became clear to Beijing that the September 1 round of tariffs, at least, were as good as done.

And so, in what may prove an alarming turn for the worse, we suspect Beijing tried to hit especially hard.

We think the decision by Beijing to announce its retaliatory tariffs last Friday, the day of the high-profile conclave of Federal Reserve and other major global central bank officials in Jackson Hole, may not have been made by chance.

A US market sell-off, even if “by happenstance,” that would even hint at investor concerns the most powerful central bank may lack ammunition to counteract a full-on trade war with China one imagines would be a devastating message to deliver, to say the least.

As a reminder, earlier this month, in what may prove to be a prescient report (see SGH 8/7/19, “China: “All-out” Trade War”), we outlined precisely an evolution in Beijing’s strategy towards inflicting pressure deliberately and directly onto the US economy and markets, as needed, to bring the volatile US president to a chastened negotiating stance where he backs off, rather than piles on against, China’s number one demand – that tariffs be rolled back.

Lest their message be lost, Beijing’s decision on Friday to also sneak in a 5% tariff on soybeans, while of little near-term economic significance given the freeze already in agricultural imports from the US, was also, again, a highly inflammatory and aggressive threat against the very heart of Trump’s 2020 campaign.

Sources in Beijing furthermore point out that more than half of the US good subject to punitive tariffs come from “swing states” in the 2020 US presidential elections.

Already seething over suspicions that China may just now be trying to wait out his administration, that can only have further triggered the President on his now widely-reported, livid response on Friday “hereby ordering” US companies to pull out of China.

But to Meet, and if so When?

As to whether the touted late-night call from Vice Premier Liu He to US top negotiators was ever actually made, we will refrain from comment.

We would, on perhaps the more generous side, suggest the description of that, very specific, call may have evolved from public comments directed at US officials by Liu He at the opening of the 2019 Smart China Expo in Chongqing, reported by Caixin news agency, stating, “We  firmly oppose the escalation of the trade war… [that is] not conducive to China, the US and the interests of the people all over the world.” But hey, we don’t exactly know.

That said, throughout the past few weeks there have been calls made between the US and Chinese delegations at deputy and technical levels to at least keep a line open for a resumption of more substantive trade talks, as hoped for, in September.

Despite the perception White House officials had, at least until the weekend, been trying to encourage, there was and as far as we know there still is no confirmation of a meeting at the principals’ level that has been agreed to.

Another principal’s meeting may still come together soon, (it is after all better to talk than fight), but National Economic Director Larry Kudlow has been careful since the weekend to downplay any firm expectations for that: they could come sometime (as opposed to early) in September, and he likewise clarified it has been the US side that has been expecting talks to proceed as planned.

Looking ahead, we believe the two sides have shot their ammunition for now, and that there may indeed be a pause between any further action. Indeed, there may very well be a new round of talks. And on the plus side – and entirely speculative on our part – a “give” by President Xi on, for example, Chinese exports of the toxic drug fentanyl to the US it appears to us could prove an easy gift.

But any real breakthrough is still, as things stands, pure conjecture, and the two sides appear to be far from anything even remotely resembling a deal.

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