China: Sowing the Seeds for October

Published on September 23, 2019
SGH Insight
** As to last week’s vice-ministerial level meetings, sources in Beijing note that there was little progress on any substance in those talks, but enough goodwill was established between the two sides to pave the way for Vice-Premier Liu He to visit Washington in October, as hoped, for the 13th round of talks. From what we understand, preparations are being made now for the principals’ meeting between Liu, US Trade Representative Robert Lighthizer, and Treasury Secretary Steven Mnuchin for the week of October 6.

Market Validation
(Bloomberg 9/24/19)

U.S. equity-index futures advanced and European stocks rose modestly with Asian shares as investors weighed hopes for high-level trade talks next month against mixed economic data from around the globe.
Contracts on the three main U.S. equity benchmarks all pointed to a firm open after Treasury Secretary Steven Mnuchin confirmed Chinese Vice Premier Liu He is headed to Washington in coming weeks and China was said to have given waivers for tariff-free American soy purchases.

Stocks
Futures on the S&P 500 Index increased 0.3% as of 8:28 a.m. New York time.
The Stoxx Europe 600 Index increased 0.1%.
The Shanghai Composite Index gained 0.3%.
The MSCI Emerging Market Index climbed 0.1%.
Bonds
The yield on 10-year Treasuries sank three basis points to 1.70%.
The yield on two-year Treasuries declined one basis point to 1.67%.
Germany’s 10-year yield climbed less than one basis point to -0.58%.
Britain’s 10-year yield gained one basis point to 0.558%.
Japan’s 10-year yield fell three basis points to -0.234%.

US equity markets got a boost today on reports that Chinese importers had ordered about 600,000 tons of soybeans from US producers for delivery through the remainder of 2019.

** While these purchases would certainly represent a confidence building exercise in the right direction, senior Chinese officials stress that Beijing will not buy US goods, especially agricultural products, on a large scale, until negotiations have made substantial progress (emphasis added). Today’s news was, simply, a down-payment ahead of the upcoming meeting of the principal negotiators in October in Washington DC.

** As to last week’s vice-ministerial level meetings, sources in Beijing note that there was little progress on any substance in those talks, but enough goodwill was established between the two sides to pave the way for Vice-Premier Liu He to visit Washington in October, as hoped, for the 13th round of talks. From what we understand, preparations are being made now for the principals’ meeting between Liu, US Trade Representative Robert Lighthizer, and Treasury Secretary Steven Mnuchin for the week of October 6.

** Having said that, sources in Beijing are confused over what they believe to have been another negotiating U-turn last week from President Donald Trump. Namely, they maintain it was Trump himself who communicated a desire to seek an “interim” deal with China before these rounds of talks, only to hear him dismiss that prospect by the second day of the vice-ministerial discussions. Whether that represents a negotiating tactic from Trump, or a sign of a more protracted and grueling fight ahead towards that elusive “comprehensive” deal, which could even include the imposition by the White House of the threatened tariff hikes on October 15, is to them unclear.

** In the meantime, even as the news of purchases was breaking today, US Agriculture Secretary Sonny Perdue encouraged China to buy 20 million tons, or more, of soybeans, citing a previous “unfilled” commitment from Beijing that is not related to the just concluded meeting between the two sides at the deputies’ level in Washington last week.

** While Perdue provided no context around that “commitment,” we would refer to a May planning meeting of China’s State Council in which sources indicated that “if the US and China were to reach an agreement… [soybean] imports from the US could reach last year’s levels, but are unlikely to exceed 20 million tons” (see SGH 5/6/2019, “China: Trade and Agricultural Commodity Imports”).

** As a point of reference, these same sources also contrasted those import numbers with 2018, where 19%, or 16.64 million tons, of China’s total soybean imports of 88.03 million tons came from the United States, or to the more halcyon days of 2017, where the US represented 34%, or 32.9 million, of China’s total imports of 95.54 million tons.

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