China: new trade talks put escalation fears in the background

• US-China trade talks are set to resume in Washington in October. While we do not see scope for a big breakthrough, it may put escalation fears in the background for now. The situation is still very fluid, though.

• Xi Jinping mentioned the word ‘struggle' 60 times in a speech this week.

• China signals more stimulus is coming in order to keep growth within the 6.0-6.5% growth range. PMI data still signal weakness but no hard landing.

• USD/CNY is close to 7.20 but should take a break here as the People's Bank of China signals it has gone far enough and trade war fears are abating for now.

• Hong Kong has withdrawn the extradition bill but it is still unclear whether this will stop the crisis.

Trade talks set to resume but very hard to break the deadlock

We finally got confirmation this week that the US and China will meet for new talks in Washington. They are set to take place in early October and not September as earlier planned. However, lower level officials will prepare for the meetings in September.

While there have been few signs of the two sides moving closer to a deal, there was a lift to sentiment following the news. A slightly more upbeat tone from insiders in China partly supported the positive mood. The Chinese Global Times state media, a more nationalistic and international version of People's Daily, referred in an editorial to the message that both sides agreed to ‘jointly take concrete actions to create favourable conditions for further consultations in October'. A blog on Chinese social media called Taoran Notes said on Thursday that it is ‘very likely' there will be ‘new developments' in the upcoming trade talks. Taoran Notes is a blog by the state-owned Economic Daily, which is seen as a channel for communicating China's stance in the trade talks.

On a less upbeat note, Chinese media reported that US company FedEx had illegally transported certain knives to Hong Kong. China has yet to put American companies on its ‘unreliable entities list' but FedEx could be in danger of being among the first. The list is a direct response to the US ‘Entities List', which blacklisted Huawei.

Comment: While we are sceptical about a decisive breakthrough at the October talks, the planned meetings are likely to put fears of new escalation in the background for a while. This is a supportive factor risk sentiment in the short term. One thing to look out for is whether the US carries out the tariff increase from 25% to 30% on USD250bn on 1 October. It is the 70-year anniversary day of the People's Republic of China. If China can convince the US to at least delay the increase, it would be positive for financial markets. China may also wait to put US companies on its ‘unreliable entities list' until after the talks in October in order not to stir things up. Our baseline is still no deal on this side of the US election in November 2020, 8 August.

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