China: Trump’s Call to Xi, Weak PMI and Stimulus

Published on January 4, 2019

As 2018 drew to a tumultuous close, President Donald Trump went out of his way to highlight the positive tone of a call he had just concluded with China’s President Xi Jinping, focused almost entirely on the state of trade negotiations between the two.

The call, lasting, per Chinese sources, over 30 minutes, was placed by Trump on Saturday night, December 29, Beijing time, and was the first call between the two leaders since their December 1 summit meeting in Buenos Aires.

*** As relayed by Trump, the tone of the call was indeed friendly, but more to the point, the two leaders confirmed a desire to refrain from any further escalation of tariffs, to step up negotiations towards the removal of all additional tariff threats, and to work towards a comprehensive agreement on trade, agreeing to the now formally announced bilateral deputy-level meeting starting in Beijing on January 7. ***

*** And with the clock ticking on the two leaders’ 90-day truce that was agreed to in Buenos Aires, we understand China’s lead delegate, Vice Commerce Minister Wang Shouwen, will kick-off discussions with his US counterparts next week with a series of offers to import more goods from the United States. Expectations in Beijing are that Trump, for his part, will also go out of his way to press the US delegation, led by Deputy US Trade Representative Jeffrey Gerrish and Treasury Undersecretary David Malpass, for a positive outcome to this first round of talks. ***

All these recent interactions, observes a senior Beijing source, are positive signs that the world’s two largest economies are trying to manage their differences to bring ties back on track after months of trade war.

Nevertheless, this official could not resist also noting the real reason for the timing of Trump’s call to XI just may have been to support the US stock market after the ugliest Christmas Eve plunge ever.

And on a perhaps less constructive note, this has led to some sniping in Beijing that the chances of whether a trade deal can be reached or not with the US depends less on what concessions China is willing to make, but on the US stock market performance, and on Trump’s concerns over the US real economy.

Addressing China’s Slowing Economy

Meanwhile, of course, the economic picture in Beijing is not exactly one of all roses either.

Following Sunday’s sub-50 (49.4) December PMI reading that spooked investors – the first contraction since July 2016 and the weakest reading since February of the same year – the People’s Bank of China did not hesitate to announce a 100 basis points cut in their Reserve Requirement Ratio. That helped, at least for now, stabilize their markets.

In light of that, we would highlight three major policy decisions in support of the economy that we understand were made at the final 2018 meeting of China’s Central Economic Work Conference held on December 19-21, with a comment on the currency as well.

These were included in our report on Christmas Eve day, and thus may very well have been missed amidst the holiday cheers, or the stock market meltdown du jour, and so against our usual practice we are briefly repeating them here (see SGH 12/24/18; “China: CEWC and Leadership’s 2019 Targets”).

  • First, the CEWC agreed broadly to implement “countercyclical” and “proactive” fiscal and monetary policies to ensure that GDP would not fall below the coming year’s more modest 6.0-6.5% GDP target, and that the 6.0% GDP floor would be defended at all costs, even in what we believe is the unlikely event there is no agreement with the US to at least de-escalate tensions over trade.
  • Second, on monetary policy, Premier Li Keqiang flagged the possibility of “some loosening” in 2019 as downward pressure accelerates on the economy, which was relayed to us as expectations the PBOC should be ready to deliver 4-5 RRR cuts next year. That is significantly higher than the end of year market consensus for 3 cuts in 2019 – and the PBoC has the go ahead to even deliver an actual benchmark rate cut if “very necessary.” Note that even after the cuts announced last night go into effect, the RRR rate for large banks will stall stand at 13.5%, and for small banks at 11.5%.
  • Third, tax cuts that are also to come, as hinted by Li Keqiang last night, refer we believe to the CEWC suggestion for a 2019 tax cut on businesses and individuals equating to about 1.0-1.2 trillion Yuan. That would be up from the 800 billion Yuan of tax cuts instituted in 2018.

Finally, even with that stimulus, the CEWC steered clear of any suggestion they could be targeting or even condoning a weaker currency, sticking to the mantra the Renminbi is to be kept at a “basically reasonable and balanced” level.

The desire to avoid political charges from the US or other trading partners over FX depreciation was clearly confirmed in the wake of the RRR cut last night, where one stated explanation for splitting the 100 basis points cut into two tranches was to counteract any knee-jerk market weakening of the Yuan.

More broadly, the initial readings after the weak PMI number on Sunday are that both central bank and regulatory sources expect potential big swings in the FX rate in 2019 due to unsettled global economic fundamentals, political uncertainties, and volatility in equity, bond, and commodity markets.

For these reasons, while that may well translate into more two-way movement for the dollar as well, these officials still see less room for the dollar to rise in 2019 than it did in 2018.

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