China: Washington Picking Its Battles

Published on May 12, 2020

The cycle of mounting tensions between Washington and Beijing that is playing out in the wake of the COVID-19 crisis is sure to escalate as U.S. President Donald Trump takes measure of the havoc wrought on the country and on his presidency from the global pandemic.

But the Trump Administration, single-mindedly focused at this time on nursing the shuttered U.S. economy back to its feet, will pick and choose its battles with China in the run-up to November.

** Among the actions the administration had been preparing was the executive order directed overnight at the Thrift Savings Plan, the pension plan for a large number of U.S. government employees, to desist from investing $50 billion it had allocated to the MSCI All World Index Fund that would include around $4 billion of investments in Chinese shares.

** While modest in size, that presidential order is significant not just as a political one-off, but should also be seen in context of the much more far-reaching parallel efforts spearheaded by Senator Marco Rubio (R-FL) to force Chinese companies that list on U.S. exchanges to comply with U.S. audit and accounting standards.  With concerns over market turmoil, that plan was put on ice, but never killed (see SGH 5/5/20, “China: U.S. Preparing Retaliatory Measures”).

** One fight that we suspected in that report neither Washington and certainly not Beijing was interested in picking – at least not at this moment in time — was over the Phase One Trade Accord negotiated last year between U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin, and China’s Vice-Premier Liu He, and touted as one of President Trump’s major policy victories.

** Indeed, the official read-out from both sides of a bilateral call initiated by the U.S. side on Friday between the lead trade negotiators to take measure of the state of the trade deal was clearly intended to convey a reassuring message to markets, and Trump has, for now at least, reserved judgement on whether to raise tariffs as one form of “compensation” from China that is increasingly being considered in Washington.

** On that call, the two sides, in the diplomatic version of a love fest, “agreed to enhance macroeconomic and public health cooperation, to create a favorable atmosphere and conditions for the implementation of the China-U.S. Phase One trade deal, and to maintain communication and coordination,” emphasizes one State Council source.

** And in a sign of economic goodwill (and self-interest), through the broader backdrop of escalating political tensions, Beijing followed the call with an announcement that it would be exempting certain U.S. produced items from import tariffs, while the USTR announced the same on its end. That the Chinese exemptions included imports of items such as radar equipment for navigation, while the U.S. exemptions included disposable plastic hospital wristbands, one can only hope reflects the local Chinese reporting.

** But while markets and the press have largely focused on China’s politically sensitive purchases of agricultural and energy products from the U.S., from what we understand Vice-Premier Liu also went out of his way on that Friday call to highlight a barely noticed announcement the day before that China would be removing quota restrictions on two major inbound investment schemes, the QFII and RQFII, effective June 6. In addition, Beijing will launch a registration-based IPO system on Shenzen’s start-up board ChiNext in August…for all those investors clamoring to get in.

** But while it is clear the players on Friday’s call have every incentive to keep economic tensions at bay, they do not constitute the final word on the matter, and Beijing remains on high alert that Trump could yet choose to hit China again on trade.

** And for all the efforts to put a good face on the implementation of the trade deal, which serves both sides’ political interests, the not so secret reality is that there is zero chance that Beijing delivers, or can deliver, on the promises it made for this year in the Phase One Trade Accord. That is an assessment that comes, in private, from the very highest levels of government in Beijing after Friday’s call.

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