China Needs Even Trump’s Mini-Deal on Trade as Economy Suffers

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The official Chinese response to the “phase one” trade deal with the U.S. reached Friday was wary but welcoming, underlining that Beijing has few options but to play along with U.S. President Donald Trump if it wants to relieve some of the pressure on its slowing economy.

China received scant relief from U.S. tariff pressure in the accord other than the waiving of a small increase in duties that had been scheduled for next week, a far cry from the complete removal of extra duties that had been their previous negotiating position.

In return though, China hasn’t had to give much away other than vague commitments on its currency and intellectual property-practices, plus the purchase of agricultural commodities that it needs anyway. For President Xi Jinping, needing to shore up confidence in the world’s second-largest economy while he faces down a hardening rebellion in Hong Kong, that appears to be good enough for now.

“The mini deal is about the best that could have been expected and there is a long way to go yet to get a comprehensive solution,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors Ltd. “But it highlights the intense economic pressure on both the US and China to de-escalate the trade war.”

Official media barely referred to the outcome of the meetings between Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin in Washington as a “deal” at all.

The state-run Xinhua news agency referred to the “rational and pragmatic” progress in the latest trade talks, while Taoran Notes, a state-affiliated blog that’s given key commentary during the talks said there’s “no need to be overly optimistic.”

Hu Xijin, the editor-in-chief of the Communist Party tabloid Global Times, tweeted about the restrained reaction.

Gross domestic product data for the third quarter due next week will likely underline the continued need for China to make peace with the U.S. Output growth in the three months to September is expected to have slowed to 6.1%, the slowest in almost three decades and a pace barely enough to allow the Communist Party to claim it’s hitting its own long-term growth targets.

Data on September’s trade performance will also show the ongoing pain inflicted by the trade war and slowing global demand on the world’s largest exporter. Manufacturers have seen their overall business contracting for the past five months, and new export orders contract for 16 months.

“China is buying time for its companies to adjust to shifts in demand and the supply chain,” said Chua Hak Bin, an economist at Maybank Kim Eng Research Pte. in Singapore. “This looks more like a ‘goodwill plus’ than a breakthrough trade deal.”

A bigger deal has receded from reach partly because China has been seen as unwilling to make the concessions on its own industrial policies that the Trump administration has previously asked for. While the U.S. has long railed about Beijing’s state support for its companies, the Communist Party under Xi has only strengthened its grip. Any substantive concessions on that front in order to secure a lasting deal would be difficult for Xi to sell.

China-U.S. relations deteriorated rapidly last week amid the furor over a pro-Hong Kong tweet from a U.S. basketball executive and the unveiling of U.S. sanctions on companies accused of abetting human rights abuses in Xinjiang.

Trump’s threat of higher tariffs on $160 billion of Chinese goods in December remains in place, underscoring why the Xinhua commentary Saturday warned of “many uncertainties” ahead. Against such a backdrop, the limited deal is being hailed as a trust-building step and not much more.

“The Chinese trade negotiators are caught up in a difficult political environment where any compromise to U.S. will not be welcome at home and the public are willing to see a tough policy,” said Suisheng Zhao, executive director of the Center for China-U.S. Cooperation at the University of Denver’s Graduate School of International Studies.

“While making pragmatic negotiations with the U.S., state media is still in line with the public’s inflated confidence,” he said. “This aims to ensure the legitimacy of the Communist Party’s rule at home and social stability amid a slowing economy.”

— With assistance by Kevin Hamlin, Dandan Li, and Tongjian Dong

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