We remain cautious over the 90-day ceasefire on US- China trade dispute. Over the weekend, the US agrees to postpone raising tariff on US$200B worth of Chinese goods from 10% to 25%. In return, China would buy significant amount of US goods within agriculture, energy and industry products. Meanwhile, both sides would immediately begin negotiations on “structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusion and cyber theft, services and agriculture”. Our reservation about the truce lies on the fact that the size of China’s purchase of US goods is unspecified. Moreover, the concessions China made are related to drug control and a merger deal of two technology companies. These are not the top-prioritized issues in the trade dispute. Indeed, there is no guideline on how to deal with the matters of intellectual property transfer, China’s support on state-owned enterprises and “Made in China 2025”.
While It Makes Economic Sense to Reach a Deal…
With global economic growth has moderated in the second half of this year and will persist in 2019, Trump and Xi understand trade war is detrimental to both sides. China’s economic growth is obviously affected since Trump imposed the first trade tariff in mid-2018. The authority’s economic policy has shifted from deleveraging to growth stimulation. While the Fed has increased interest rates for three times so far this year, PBOC lowered the required reserve ratio for four times. The monetary policy divergence is detrimental to renminbi. USDCNY has risen 6-7% since the beginning of the trade war. Renminbi’s weakness would have been more pronounced if it had been allowed to float freely.
While staying strong, US GDP growth in 3Q18 has shown signs of easing, as the effects of fiscal reform fades. US inflation has also been moderating over the past few months, while still hovering around Fed’s +2% target. Last week, Fed Chair Jerome Powell’s dovish shift, suggesting the policy rate is “just below” neutral, has led the market trim expectations of rate hikes in 2019.
Uncertainty Remains High amidst Hawkish Stance on Both Governments
Both Trump and Xi would hope to reach a deal as soon as possible. Yet, trade is not just an economic issue. More often it is political. It is interesting to see China downplay its concession made for the ceasefire. It merely mentioned in its official statement that it would increase imports from the US according to the people’s demand. It refrained from describing the amount of purchase as “substantial” or “huge”. While US Treasury Secretary Steven Mnuchin noted that China has agreed to eliminate tariffs on imported automobiles, China stayed silent on the matter. Meanwhile, China did not mention in the statement that there is a 90-day negotiation timeline before the tariffs would be raised to 25% if there is no agreement by the end of the period. Deriving its legitimacy to rule from nationalism, the Chinese Communist Party is reluctant to display to the people its weakness in foreign affairs.
Seeking a second term for his presidency, Trump is keen on getting some benefit from the trade deal with China. We expect that Trump to want to get a trade deal done by 2019. Yet, it might not be easy to strike a balance between standing firm and not risking domestic economic growth.