China: A “Mini-Truce,” with Major Tensions

Published on September 30, 2019

The official reaction from Beijing to press reports on Friday that the Trump Administration was looking into measures to curtail listings of Chinese companies on US exchanges, to stop their inclusion in widely followed Wall Street indices, and to restrict US government pension funds from investing in such firms that do not fall under US accounting oversight rules has been deliberately vague and measured. And that has been followed by the announcement today of yet more Chinese purchases of soybeans on US markets.

But that does not mean all is well in the run up to Vice-Premier Liu He’s visit to Washington on October 10-11 on the heels of the 70th year anniversary celebrations of the founding of the Peoples Republic of China that kicks off tomorrow.

** Officials in Beijing interpret Friday’s US media reports, and the subsequent “clarification” over the weekend by a US Treasury spokeswoman, as a reflection of the ongoing divisions between China “hawks and doves” in the Trump administration.

** They see the timing of these media reports as deliberate efforts led by the most vociferous of the China hawks in the White House, Assistant to the President Peter Navarro, to place a roadblock ahead of the upcoming round of talks in Washington. In this, they may be sorely mistaken.

** While Navarro, for his part, attempted this morning to calm markets by debunking Friday’s reports as “fake news,” and Treasury has assured that no such measures were under consideration, the pushback, from both, has been over timing, and not over the substance of the story.

** Indeed, what has been missing is any denial that there have been discussions within the White House of these investor protection and oversight issues, which were in fact raised in June of this year under the bi-partisan “Equitable Act” legislation introduced by Senators Marco Rubio, Tom Cotton, Kirsten Gillibrand, and Bob Menendez.

** Furthermore, the reporting of these deliberations never suggested, as officials in Washington went out of their way to “deny,” that action on this front was imminent. But with China caught in the crosshairs of this legislation, even if any alleged such discussion was not intended to track the trade talks, one might understand how Beijing could take the reports as a salvo directed at Liu He’s visit.

** Regardless, Chinese officials believe “pragmatists” such as US Treasury Secretary Steven Mnuchin have been trying to persuade President Donald Trump to reach an agreement with Beijing. However, they warn that if Trump wants a deal that works, he must change his negotiating strategy…or his negotiating team. The negotiator they would like to see replaced is not hard to imagine.

** As to the upcoming round of talks, Chinese negotiators maintain they do not hold out great prospects for reaching an “interim agreement.” But markets may nevertheless take solace at a mini-truce that would see a continuation of an increase in the purchase of agricultural products by Beijing, in exchange simply for an agreement by the White House to refrain from hiking tariffs on $250 billion of Chinese imports on October 15 from 25% to 30%, as currently threatened. That certainly appears to be a low bar for that mini-truce to be struck.

** But on a more material level, Chinese sources relay that if the US side continues to insist on negotiating according to the text of the US negotiations that were abandoned in May, talks eventually will be “doomed to a bad outcome.”

** And lest they appear, as Trump likes to say, “desperate for a deal,” they somewhat defiantly now point to the sanctioned Huawei, not as a negotiating vulnerability, but as proof of the resilience of China’s companies and economy.

** In that, they cite Huawei’s 63 commercial 5G network contracts as of September 15 compared to 41 on May 10, and pointedly add that Huawei has been making 5G base stations without US components since August 21. And furthermore, the performance of these new 5G base stations, they boldly claim, is “slightly better” than when using US components. At least that is the message.

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