China’s Vice-Premier Liu He and US Trade Representative Robert Lighthizer are scheduled to review the implementation of the Phase One trade agreement between the US and China by videoconference this coming Saturday, August 15.
** On the heels of the recent escalation in tensions between Washington and Beijing, highly placed sources in Beijing suggested over the weekend that a “temporary cancellation or postponement” of the high-level virtual meeting “cannot be completely ruled out.”
** Such a decision, which would mean the trade deal is being pulled, even if gently, into broader bilateral disputes, would be highly disruptive to markets who to date have operated on the assumption that Phase One, for both sides, is on an independent track from all other disputes. But, warn sources who are vested in continued economic dialogue with the United States, if the administration of President Donald Trump were to “continue” to provoke China over these next few days, the talks will have to be temporarily canceled or postponed.
** Assuming talks proceed as scheduled, Vice-Premier Liu He, from what we understand, will raise issues surrounding TikTok, WeChat, and Huawei with his US counterpart, in addition to taking stock of the implementation of the Phase One trade accord, as these are all seen to lie directly within the economic domain. He will also urge the US to stop countervailing probes over “so-called” Renminbi currency undervaluation. Liu will, however, steer clear of all the non-economic bilateral issues, including Taiwan, Hong Kong, Xinjiang, and the South China Seas.
** Consistent with Beijing’s modus operandi of responding kind-for-kind to tensions with Washington, there will be no economic or trade retaliation against US Health and Human Services Secretary Alex Azar’s trip to Taiwan, but rather a diplomatic response and military maneuvers. China has already lodged “solemn representations” to the US over what it sees as a provocative act, and has urged the US not to send “wrong signals” to Taiwan “secessionists” on Wednesday.
** In addition, China’s People’s Liberation Army will conduct a three-day large-scale military exercise starting Tuesday in the Zhoushan Islands, a good distance north by west of Taiwan. Military communication channels between the two powers have, as would be hoped, been carefully maintained through this all, including President Trump taking the initiative, according to Chinese security sources, to ask Secretary of Defense Mark Esper last Thursday to establish contact with China’s Defense Minister, Wei Feng.
** Regarding the Trump administration’s executive orders banning transactions starting in 45 days with the parent companies of social media apps TikTok and WeChat — ByteDance and Tencent respectively — senior Chinese negotiators suggest Beijing has no intention of sanctioning Apple or Microsoft in return. While China’s market size is close to that of the US, these sources concede the US still enjoys technological superiority over China, and suggest that ultimately it will be the Chinese consumer that will move away from iPhones, and Qualcomm itself that will be hurt with a complete prohibition of the sale of chips to Huawei.
** Industry and Information Technology officials in Beijing are, however, not as laissez-faire, and have been in close contact with the leaderships of ByteDance, Tencent, Huawei, and other top Chinese technology firms. It appears there may be resistance to a complete sale of TikTok to Microsoft, as, brushing off the stated US security and privacy concerns, Beijing believes President Trump’s intention may be to drive TikTok out of the US, or to force a fire sale of the app into US hands. A legal challenge seems imminent either way.
** Chinese sources, on the other hand, suspect President Trump’s executive order targeted at WeChat may not be enforced. That assumption appears not to be based on any information save an observation that WeChat has become a pre-installed app on many mobile devices, especially in China, and the loss of Chinese customers due to a ban on WeChat would mean a shift of a large number of users from the iPhone to Huawei, or other Chinese domestic smartphone vendors, resulting in losses to Apple.