China: phase-one deal moves closer as 15 Dec deadline is near
|Rollercoaster news flow on trade deal as 15 December deadline is approaching. Trump flip-flops and now says talks ‘moving right along'.
PMI data add to case for a moderate Chinese recovery. A wide range of indicators supports this picture.
Huawei makes smartphone without US microchips - but is at risk of facing US financial sanctions that could add to headwinds for the company.
Trump strikes again
US President Donald Trump caused some jitters in financial markets this week when he suggested a trade deal could wait until the other side of the election. His Commerce Secretary Wilbur Ross added to the story by saying to CNBC that waiting until after the 2020 election to reach a deal could take away some of Beijing's leverage. However, the day after Bloomberg reported that US officials close to the talks said the US and China are moving closer to agreeing on the amount of tariffs that would be rolled back in a phaseone deal. They also expressed belief that a trade deal would be completed before US tariffs are set to rise on 15 December. Trump chipped in himself on Thursday saying talks were ‘moving right along'.
On top of the Hong Kong bill voted through Congress recently, the US House of Representatives this week passed the Uyghur Human Rights Policy Act, which calls for targeted sanctions on members of the Chinese government related to Xinjiang re-education camps. It triggered a sharp response from China but there are no signs yet that the bills are affecting the trade talks.
Comment. We continue to look for a phase one deal to be struck soon and most likely over the coming week ahead of Sunday 15 December, when the new tariffs are set to be implemented. We may also see a postponement of the tariff increase if more time is needed for the talks. There are several reasons why we do not expect the tariffs to be implemented and that a phase one deal will be struck. First, the White House has calibrated tariffs on China, so that the first tranches would hurt the US the least. Hence, the last tranche left now will do much more damage – and possibly more so in the US than in China. Many of the products to be taxed are electronics like iPhones and laptops produced and exported by US companies from China to the US and they would thus mostly hurt US companies. As they are consumer products, the pass-through to consumers would also be much higher. Second, Trump will soon need some relief for the farmers that are in great pain due to China's lack of purchases. They generally support Trump confronting China but have also been clear that a deal has to come, so they get their biggest market back.
Of course, we can never be sure Trump is rational so until we see a phase one deal the uncertainty remains. But if he was in doubt, this week showed clearly that moving on with more tariffs could lead to significant losses in equity markets and possibly add more downside pressure to a US economy. This could end up weakening his hand in the trade talks.
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