China: Sealing the Trade “Mini-Truce”

Published on October 11, 2019
SGH Insight
Chinese officials expect the following deal, barring an unlikely last minute “accident” in advance of Liu’s meeting this afternoon in the Oval Office with Trump (see SGH 9/30/19, “China: A “Mini-Truce,” with Major Tensions”).

** China will make “substantial” purchases of US agricultural products, and the US will not raise the existing tariffs on $250 billion of Chinese imports from 25% to 30% as threatened on October 15.

** We continue to get no indication, however, that the 25% tariffs will be rolled back, yet – note that this has not been a demand we have heard from Beijing for a very limited cease-fire – nor do we have indication that there will be any assurances at this point from the US over the threatened next round of December 15 tariffs.



Market Validation
(WSJ 10/11/19)

U.S. stocks surged Friday as investors cheered progress on trade negotiations between the U.S. and China, helping the S&P 500 break a three-week losing streak.

President Trump said just before the closing bell that the two countries reached a “very substantial Phase One deal” and agreed not to implement tariffs set to go into effect next week. China, meanwhile, said it would increase purchases of U.S. agricultural products.

The Dow industrials closed up 319.92 points, or 1.2%, to 26816.59. The index rose as much as 517 points earlier in the session but pared some of those gains as traders learned that two pressure points remained unresolved: a final decision on a new round of tariffs set for December and policies around Chinese telecom giant Huawei Technologies Co.

Well-placed Chinese sources confirm the atmosphere surrounding the first day of high-level trade talks between Vice Premier Liu He, US Trade Representative Robert Lighthizer, and Treasury Secretary Steven Mnuchin was very good.

Even the usually hard-nosed negotiator Lighthizer, they noted, seemed a more relaxed man, presumably following marching orders from President Trump to work towards a de-escalation of tensions between the two sides.

Indeed, from what we understand, neither side focused on areas of great disagreement, but rather on paving the path towards getting Presidents Donald Trump and Xi Jinping to an interim agreement at the APEC summit scheduled for November 16-17 in Santiago de Chile.

As to the specifics, Chinese officials expect the following deal, barring an unlikely last minute “accident” in advance of Liu’s meeting this afternoon in the Oval Office with Trump (see SGH 9/30/19, “China: A “Mini-Truce,” with Major Tensions”).

** China will make “substantial” purchases of US agricultural products, and the US will not raise the existing tariffs on $250 billion of Chinese imports from 25% to 30% as threatened on October 15.

** We continue to get no indication, however, that the 25% tariffs will be rolled back, yet – note that this has not been a demand we have heard from Beijing for a very limited cease-fire – nor do we have indication that there will be any assurances at this point from the US over the threatened next round of December 15 tariffs.

** A market-pleasing hint of a potential rollback of the $250 billion, or that December could be shelved down the road — if all goes well — is possible, but, we expect, both threats will still be kept hanging over upcoming talks by the US for negotiating leverage, if anything.

** Regarding the US side’s insistence on the inclusion of currency language in this round of negotiations, the Chinese delegation repeated its displeasure and opposition to Washington’s labeling of China as a currency manipulator, and noted the latest bout of currency weakening was due, in fact, to US escalation in the trade wars, and not manipulation on their part.

** Regardless, the rather milquetoast language that appears to have been proposed by the US on FX will be included as a concession, even if a largely irrelevant one, for Washington, and perhaps more importantly, Beijing would expect that the Renminbi could appreciate regardless of any such FX language as a result of a truce with the US, even if a temporary one. With GDP growth of around 6.2% for Q3 of 2019, the authorities, we are told, would now be comfortable with some modest “market led” appreciation of the RMB.

Following the conclusion of Liu He’s two-day visit and meeting today with Trump, the US and Chinese negotiating teams will proceed to work further towards an interim deal to be signed by the two leaders in November, and if necessary, the US will send a delegation to Beijing for another round of talks before APEC.

Senior Chinese officials caution that even if, as expected, the two sides reach a temporary cease fire today, that does not guarantee a signing ceremony between the two heads of state in Chile, as “everything can happen or change between now and mid-November.”

“However,” they continue, “on the basis of equality and mutual respect, we are willing to reach consensus with the US through this round of talks on issues of mutual concern, to prevent a further escalation and spread of friction.”

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