China: Frustration over Trade and the Economy

Published on November 18, 2019

Vice Premier Liu He, China’s lead negotiator on trade, held a call with his counterparts, US Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer, on Saturday morning, Beijing time. The official readout of the phone call, initiated at the invitation of the US side, was that it was simply “constructive.”

*** Chinese sources report that while the atmosphere surrounding Saturday’s call remained “sound and smooth,” the conversation did not make substantial progress beyond what had already been agreed to on previous calls. They characterize this call as a “small-scale” conversation intended to iron out the details of what the two sides have agreed to already, and as such it did not include the participation of Commerce Minister Zhong Shan, nor of PBOC Governor Yi Gang. ***

*** Of potentially greater concern, senior Chinese officials warn the two sides still remain “miles apart” on the specifics of how exactly to purchase US agricultural products, and over how exactly to eliminate the Trump administration’s existing “punitive tariffs” on Chinese goods. Given the distance that remains, the two sides, from what we understand, did not discuss a timeframe for another round of face to face talks, but, rather, agreed simply to “maintain close communication.” ***

*** For all that, Chinese sources still believe both Lighthizer and Mnuchin are keen to realize a first phase deal, which would provide “a good foundation for further discussions.” But in the meantime, China’s Premier Li Keqiang warned government officials to brace for a slower Q4 2019 that will bleed, almost regardless of the outcome of the trade talks, into 2020, even while reiterating Beijing’s core positions on tariffs and trade talks. ***

Tough Talk from Premier Li

Unlike Vice Premier Liu, who expressed cautious optimism over a first phase US-China trade agreement, our understanding is that Premier Li Keqiang, in statements made in Nanchang, Jiangxi, advocated maintaining a tough stance in phase one trade negotiations with the United States, even as he warned government officials to brace for lower growth in Q4 2019 and beyond.

Lest China’s negotiating stance be lost on US President Donald Trump, Premier Li reiterated that for a deal to succeed, tariffs already imposed on China would need to be rolled back.

But even before that, Li repeated China’s insistence that no deal would be acceptable at all under the threat of additional tariffs from the US and warned that there is reason to believe that the Trump administration’s “superstitious faith in tariffs” could once again be close to killing a deal in the cradle.

That, we presume, refers to the threat of December 15 tariff hikes that are almost universally now expected to be dropped, and, at least for a first phase deal, to a rollback of the 15% tariffs already imposed on September 1 by Washington on $112 billion of Chinese imports.

Separately, a highly placed Chinese official accuses “the Trump side” of attempts to cover up the negative impact of the trade war it launched on the two countries’ economies.

A US economy that will have a hard time maintaining 2% growth next year, this official maintains, can hardly support the stock market’s “bubbled rush to its peak,” and he ominously warns that even if the US stock market “bubble’ does not burst next year, it will certainly do so in Trump‘s second term.

Incidentally, and for all the saber rattling, Beijing, as is clear here, does not appear to put great odds on Trump failing in his re-election bid – impeachment hearings or otherwise.

Measures to Cushion Flagging Growth

As to the situation back home, Premier Li Keqiang, from what we understand, delivered a sober assessment in Nanchang of the challenges facing China’s economy in Q4 2019, and through 2020.

In his comments, Li is said to have predicted that the October economic activity indicators would make hitting the 6.0% Q4 GDP target a “very difficult task,” even as the relevant departments of the State Council are drawing up a series of measures to try and keep that target within reach.

Given the slowing momentum, Li also acknowledged that the central government will bend and lower its economic growth target for next year at the Central Economic Work Conference next month.

As to policy measures to be implemented now, Premier Li said the State Council would tolerate a higher leverage level, along with an expanding deficit, to cushion the economy’s downside.

Li also said the State Council is seriously considering putting a new mechanism in place that would allow the central bank to buy bonds issued by the government to supply more funds to boost growth; to allow higher fiscal deficit levels to provide funds to finance infrastructure construction, and; to encourage investment in manufacturing.

None of those measures are expected to stop or reverse the slowdown, but rather to cushion a soft landing to a more sustainable growth rate over this five-year plan.

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