China: Trump-Xi Call on Trade Tensions and North Korea

Published on January 23, 2018
SGH Insight
From what we understand, Xi then conveyed a message to Trump that Pyongyang believes the stability of the Korean peninsula now depends on US actions. If the US were to continue to refrain from conducting joint military exercises with its allies, as it has for the duration of the Olympic games, the DPRK would not fire ICBMs or conduct nuclear tests beyond the duration of the Olympics as well.

Xi expressed China’s support for such an agreement, and held out hopes that officials from the US and the DPRK would engage in direct dialogue at the Olympics in Pyeongchang, leading to a resumption of bilateral discussions between the two countries as well a resumption of the Six-Party Talks.

Beijing, from what we understand, will furthermore seek to build on the new-found rapprochement between North and South Korea to organize a summit in the not too distant future between Kim Jong-Un and South Korea’s President, Moon Jae-in, who Xi Jinping has been actively courting.
Market Validation
(Bloomberg 3/9/18)
BFW 03/09 00:14 *CHUNG SAYS TRUMP, NORTH KOREA'S KIM WILL MEET BY MAY
BFW 03/09 00:12 *CHUNG SAYS NORTH KOREA WILL REFRAIN FURTHER MISSILE TESTS

(FT 3/6/18)
Hopes for North Korea nuclear accord lift sentiment
Agreement for talks with the south helps extend risk rally and boost the won

North and South Korea have agreed to hold direct talks between their leaders with Pyongyang signaling it is willing to abandon its nuclear programme if its security can be guaranteed.

The won is gaining 1 per cent at Won1,065.94 per dollar, its strongest level in 11 sessions.

The dollar index is slipping by 0.4 per cent to 89.726 and the euro is up 0.5 per cent at $1.2398, with the pound 0.4 per cent higher at $1.3889 The dollar tends to face selling pressure on positive geopolitical news, since its status as the world’s reserve currency gives it lingering haven characteristics.

Similarly, investors are reducing their exposure to US government debt, drawn by the prospect of stronger returns elsewhere, sending the yield on 10-year Treasuries back to 2.9 per cent for the first time in four sessions and up by 2.2 basis points. The yield was lower by a similar margin before the Korea news broke.

According to futures trade, New York’s S&P 500 will rise 0.5 per cent at Tuesday’s open, adding to a climb of over 1 per cent on Monday.

US President Donald Trump and China’s President Xi Jinping held their first phone call of the new year last Tuesday morning, January 16, Beijing time. The two main topics were Sino-US trade tensions, and North Korea.

*** The two leaders acknowledged it was in the best interests of both countries to keep economic relations on a stable and healthy track. But according to Chinese sources, the two then laid out their respective viewpoints on bilateral trade in a direct, blunt fashion: in particular, President Trump expressed disappointment that the US trade deficit with China had continued to expand to a new high in 2017, and warned that if this trend were to continue, the US would have to take punitive actions in the coming months (emphasis added). ***

*** Xi’s response was to outline numerous areas China had delivered on commitments made by the two leaders at their summit last April in Mar-a-Lago, pointing to imports of agricultural products from the US, the further opening of China’s financial sector, and, in a not so subtle reminder of China’s market clout, to China’s continued holdings of US Treasuries.  The US side, he noted, had on the other hand failed to deliver on some of its promises, such as the easing of restrictions on hi-tech exports to China. ***

*** The North Korea discussions were more constructive, with Trump asking details about North Korea’s involvement in the upcoming Winter Olympic Games in Pyeongchgang, and indicating a willingness to allow direct contact between officials from Washington and Pyongyang. Xi conveyed a message from North Korea that if the US were to continue to refrain from conducting joint military exercises with its allies, the DPRK would continue to refrain from launching intercontinental ballistic missiles (ICBMs) and conducting nuclear tests, after the Olympic games (emphasis again added). ***

It was, in effect, an offer to extend the current détente.

Tough Trade Talk

Last week’s phone call was the tenth call between Trump and Xi Jinping since Trump was elected president, and, according to Chinese sources, it was initiated at the request of Washington.

In the call, President Trump stressed his disappointment that the US trade deficit with China had continued to expand to a new high in 2017, and asserted the huge deficit was not sustainable. Were the trend to continue in the coming months, he warned, the US would be left with no choice but to impose punitive tariffs on several Chinese products, presumably with steel and aluminum high on the target list.

President Xi responded that China’s imports from the US had risen by 17.3% year on year over the same period, in 2017, exceeding a 10% target that had been set at the two leaders’ Mar-a-Lago summit last April. 

Furthermore, he pointed to other commitments China had kept from that Mar-a-Lago summit, including a further opening of China’s financial markets, imports of crude oil from the US, increased imports of agricultural products from the US including the resumption of imports of US beef and GMO corn.

Pointedly, Xi also noted the continued holding of US Treasury bonds.

By contrast, Xi complained, the US had not carried out its end of the bargain, including continued restrictions on the US export of high-tech goods to China, restrictions on Chinese joint ventures with US semiconductor firms, and the alleged unfair treatment of Chinese investment ventures into the US.

Xi continued to stress that China does not deliberately pursue trade surpluses, and that any such surplus with the US would be simply a result of the differing states of development between the two countries, and of deepening economic globalization.

Subsequent to the call, senior Chinese economic officials privy to the discussion added, off the record, that while they hoped there would be no “severe” trade confrontations between the two countries this year, if one were to occur, the US would have more to lose than China. 

They warned specifically of China’s influence on the Treasury markets, as well as the potential for the enormous stock market gains in the US to reverse on the back of higher bond rates and trade disputes, citing a joint report allegedly from the People’s Bank of China and various Chinese agencies predicting the Dow might top out anyway after hitting the 28,000 – 30,000 mark.

Building on Progress in North Korea

The discussions over North Korea were on the other hand both more substantive and positive, with the two leaders acknowledging tensions on the Korean peninsula had shown signs of easing, with the resumption of inter-Korean dialogue (see SGH 11/22/2017, “North Korea: Outreach Behind the Escalation,” and 12/6/2017, “Sensitive Negotiation Backchannels”).

Xi and Trump pledged to work together with other members of the international community towards the denuclearization of the Korean peninsula, and Trump reportedly expressed appreciation for China’s role in helping ease tensions, while stressing the need for Beijing to continue to exert maximum pressure on Pyongyang and on North Korea’s Supreme Leader, Kim Jong-Un.

In a less scripted side note, Trump expressed curiosity over North Korea’s plans for the Winter Olympics, and wondered who would lead its delegation to the games?

From what we understand, Xi then conveyed a message to Trump that Pyongyang believes the stability of the Korean peninsula now depends on US actions. If the US were to continue to refrain from conducting joint military exercises with its allies, as it has for the duration of the Olympic games, the DPRK would not fire ICBMs or conduct nuclear tests beyond the duration of the Olympics as well.

Xi expressed China’s support for such an agreement, and held out hopes that officials from the US and the DPRK would engage in direct dialogue at the Olympics in Pyeongchang, leading to a resumption of bilateral discussions between the two countries as well a resumption of the Six-Party Talks.

Beijing, from what we understand, will furthermore seek to build on the new-found rapprochement between North and South Korea to organize a summit in the not too distant future between Kim Jong-Un and South Korea’s President, Moon Jae-in, who Xi Jinping has been actively courting.

Back to list