China: An August Trial Balloon

Published on August 7, 2018
SGH Insight
*** From what we understand, Beijing may be ready to provide assurances, one more time, that it will reduce the total trade surplus with the US by an agreed amount. But any agreement from Beijing would not include concessions on China’s strategic drive towards dominance in technologies including robotics, artificial intelligence, and 5G telecommunications networks. ***

*** We believe this remains nothing more for the moment than a trial balloon to feel the Trump Administration out, and from what we understand there have been no communications of substance yet between China’s powerful Vice Premier Liu He and his US counterparts since talks broke down exactly one month ago, today. With November elections in mind, Beijing feels the time may be ripe, perhaps by the middle or end of August, to give it another try. ***
Market Validation
(Bloomberg 8/16/18)
China will dispatch Vice Commerce Minister Wang Shouwen to the U.S. for low-level trade talks in late August, the first official exchanges since earlier negotiations broke down two months ago.
The Chinese delegation led by Wang will meet with an American group led by David Malpass, under secretary for international affairs at the Department of the Treasury, at the invitation of the U.S., China’s Ministry of Commerce said in a statement on its website on Thursday.
The news buoyed risk sentiment in Asian trading, with futures on the S&P 500 Index rallying as much as 0.4 percent.
The offshore yuan gained against the dollar for the first time in seven days.

This weekend’s headlines were dominated by the tough rhetoric and aggressive Chinese official media editorials that included vows to dig in for a protracted trade war with the US, even at the expense of the country’s short term economic interests if need be.

But through the tough rhetoric, Beijing remains keen on de-escalating the trade war with the US and is looking to float a proposal that could give Trump a valuable, even if partial, political victory on trade before the November mid-term elections.

*** From what we understand, Beijing may be ready to provide assurances, one more time, that it will reduce the total trade surplus with the US by an agreed amount. But any agreement from Beijing would not include concessions on China’s strategic drive towards dominance in technologies including robotics, artificial intelligence, and 5G telecommunications networks. ***

*** We believe this remains nothing more for the moment than a trial balloon to feel the Trump Administration out, and from what we understand there have been no communications of substance yet between China’s powerful Vice Premier Liu He and his US counterparts since talks broke down exactly one month ago, today. With November elections in mind, Beijing feels the time may be ripe, perhaps by the middle or end of August, to give it another try. ***

*** But just in case President Trump should choose to go ahead with threats to impose tariffs on the next $200 billion tranche of imports from China, China’s Central Financial and Economic Affairs Commission last Thursday agreed on a series of measures in response. Those would include retaliatory tariffs, at four different rates, on $60 billion of imports from the US, as well as the active targeting of “less cooperative” American companies operating in China, in attempts to further drive a wedge between corporate America, Congress, and President Trump. ***

What Beijing is assuming, correctly or not, is that the looming specter of the November mid-term elections will soon change that escalation calculus for Trump.

Beijing also Focusing on November

If assurances from Beijing that it will reduce the trade surplus with the US by an agreed amount may seem awfully similar to a proposal that was floated earlier in May of this year to reduce China’s surplus by $200 billion – and rejected at the time for being too vague and incomplete – it is.

But the assumption in Beijing is that as the calendar approaches the November mid-term elections, the Trump White House, looking to latch onto a trade victory, could now be more open to taking some “wins,” even if incomplete, while leaving a host of unresolved items open to be settled later. In the process that partial win would leave some of the thornier – yet politically popular – IP and technology transfer battles alive through the second half of President Trump’s term.

And even while the President – and his economic advisors – continue to relish in their fight with China, invoking the strong hand of the US at campaign rallies around the Midwest, many Republican Congressional candidates up for re-election are far less sanguine.

Indeed, some are attempting to make the case that the enacted revamp of the CFIUS technology acquisition process, aggressive defense authorization bills, and rather limited restrictions on China’s ZTE and Huawei corporations in total constitute significant progress already on the thorny technology, military, and IP disputes with China.

The US administration, or at least one senior official, is sending signals it, too, is willing again to talk.

Sending Feelers

The rumors last week that US Treasury Secretary Steven Mnuchin had reached out to Chinese counterparts to re-establish communications are from what we understand correct: those contacts were made with China’s Finance Minister Liu Kun at the G20 Finance Ministers’ meeting in Buenos Aires in late July.

At that meeting, Mnuchin asked for greater concessions from China, including that Beijing not follow the next round of tariffs on $16 billion of imports on a retaliatory basis. That request went nowhere, but the contact at least was re-established.

The last contact at the vice-ministerial level or higher before that had been on July 6, when the two countries set tariffs on $34 billion of imports on each other. Since the G20, our understanding is that communications have nevertheless remained tense, and as of today have not included any back-channel talks between US administration officials and China’s powerful Vice Premier, Liu He.

While preparing for the worst, senior Chinese sources are nevertheless hoping talks may resume in a more substantial way at the vice-ministerial level perhaps in the latter part of August, with the hope for an eventual summit between President Xi Jinping and Trump.

In addition to the many substantive issues, some major optical and political ones remain before that can become a reality.

An Uncomfortable U-turn

For one, Beijing will continue to refuse to concede — even as it reaches out — that it is responding to pressure, or to any signs of weakness in the economy or markets. Indeed, the narrative from unofficial sources will likely begin to revolve around how Beijing, in negotiations, essentially “has Trump’s number.”

Xi will be portrayed as simply playing along with a Trump negotiating tactic template that has been seen already in the North Korea nuclear negotiations, and then again in the EU trade talks, where Trump, it will be said, “manufactures a crisis,” and then stages a dramatic resolution that changes nothing.

Even more, claims will be made that beyond the immediate threats, Trump‘s policies are actually good for China’s strategic interests – to wit his pulling out of the Trans-Pacific Partnership trade negotiations that had excluded China, his singling out of Japan, and his clear desire to withdraw troops from the Korean peninsula.

When Trump signals he is ready to move, the thinking in Beijing goes, China will then make a major “concession” in the trade negotiations, giving Trump a pre-midterm “victory” on trade – be it out of pressure, or clever negotiations.

What remains to be seen, however, is how far this White House remains willing, if not even eager, to continue the fight itself.

With Retaliatory Measures, in Case

And in case there is no progress and Trump indeed proceeds with the next round of tariffs on $200 billion of imports from China, China’s Central Financial and Economic Affairs Commission (CFEAC) agreed on a series of measures at the fifth of its eight summer meetings, held in Zhongnanhai and presided over by President Xi, last Thursday, August 2.

From what we understand, those countermeasures will include the imposition of immediate tariffs, at four different rates, on 5,207 items of US imports worth $60 billion, as well as targeted efforts to drive a wedge between US companies that cooperate with Beijing, and those that do not.

The government is directed to welcome and continue supporting American companies that are friendly to China, adhere to China’s industrial policies, and oppose Trump’s trade protectionism.

On the other hand, the government will strengthen supervision over, and block the expansion of American companies operating in China that have complained to the US government over technology transfers and the theft of intellectual property by China, while “failing” to have ever informed Chinese authorities of such transgressions.

And for good measure, Thursday’s CFEAC meeting also laid out China’s two strategic top priorities on trade policy for the second half of the year.

The first is to ensure the utmost success for the First China International Import Expo (CIIE) slated to be held in Shanghai between November 5 and 10, where Beijing will promise to buy $500 billion of foreign goods.

The second is to take a leadership role towards meeting an extremely ambitious timetable for signing by year-end a Regional Comprehensive Economic Partnership (RCEP) that is being negotiated between sixteen Asian countries.

Representing half the world’s population – China, all ten ASEAN countries, plus Japan, South Korea, India, Australia, and New Zealand – the 16 nation RCEP discussions were initiated as a regional alternative to the Trans-Pacific Partnership (TPP) trade agreement that was scuppered last year by the Trump administration, and pointedly this time around includes China, but not the United States. 

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