China: Talks, Talks, and Defensive Measures

Published on September 3, 2019

Late last week, US President Donald Trump alluded reassuringly to conversations that were being scheduled to take place that day between the US and Chinese trade negotiating sides.

But the call that was held between the two parties on Friday morning, Beijing time, was not held with China’s lead negotiator, Vice-Premier Liu He. It was, according to Chinese sources, held rather one level lower, led on the Chinese side by Vice-Minister of Commerce, Wang Shouwen.

** In the call, our understanding is that Beijing focused on averting the next, October 1 mini-round of escalations, specifically Trump’s threats to raise existing tariffs on $250 billion of Chinese goods from 25% to 30%, in determining whether to schedule a visit by Vice-Premier Liu He to Washington in September to meet with his US counterparts. The just announced September 1 tariff round, and China’s telegraphed retaliation, did not even appear to be a major topic of discussion in the call, as that proverbial ship had very much already sailed, despite some sloppy press reporting last week to the contrary (see SGH 8/26/19, “China: A Meaningless Trade “Truce”).

** Looking ahead to the “will they or won’t they meet” in September speculation, the Chinese message appears to have been fairly straightforward: Liu would lead a delegation to Washington in September to meet with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin if the US side agrees not to raise the above-scheduled tariffs on October 1 from 25% to 30%; Beijing would agree to a phone call between the principals if the US would consider cancelling those tariffs, and; should the US decide not to cancel the October tariffs, not only would Beijing cancel any visit, but it would also be forced to retaliate as threatened with its own tariffs on $110 billion of US goods at the same time.

** In parallel with its efforts to keep the communications channels with Washington open, as the trade war escalates Beijing is also doubling down on its contingency planning to try and help insulate China’s domestic economy from further downside shocks, including from trade.

** To that, from what we understand, Vice Premier Liu He presided over a meeting of the Financial Stability Development Committee (FSDC) on Saturday afternoon in Zhongnanhai, calling for specific policy adjustments based on changes to the external environment, as well as to the domestic economic and financial situation. The main purpose of the FSDC meeting, under the instructions of President Xi Jinping and Premier Li Keqiang, was to help ensure stable economic growth and financial market stability in the second half of the year – somewhat ambitiously pegged for around 6.2%.

** Beijing, it was noted, has already modestly eased its macro policy stance and indicated a willingness to ease further if needed. But if major indicators, particularly August industrial output data (due to be released on September 15), remain weak, the People’s Bank of China could then cut interest rates as soon as in the second half of September.

** Furthermore, Beijing will ensure the orderly (“market-led”) depreciation of the Renminbi exchange rate, support “basically stable” stock and bond markets, and fight against any “large and disorderly” capital outflows.

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