China Weekly Letter - Will the Tech War threaten a trade deal?

• US-China ceasefire off to a rocky start - but we still look for a deal in 2019
• The US-China trade deficit at a new high in October as China cuts imports
• China PMI surprised to the upside but we see more downside in coming months

A rollercoaster week as ceasefire trade talks kick off

I use most of the space for trade this week as so many things have happened - and it is by far the most important thing for China right now . The first week of the ceasefire got off to a rocky start to say the least . On Tuesday, in a storm of trade tweets, Trump spooked markets with one tweet in particular about being a 'Tariff Man'. However, on a more positive note, he also highlighted how farmers would benefit and that Chinese car tariff rates would come down. Moreover, he tweeted he believed a deal would be reached.

The news that really shook markets was the arrest of Huawei's CFO Sabrina Meng , who is also the daughter of Huawei's founder, Ren Zhengfei, and vice-chairman of the company. She was arrested in Canada for extradition to the US on claims of violating sanctions on Iran, see the SCMP . She will appear at a bail hearing on Friday morning in Canada. For more on the importance of the company Huawei, see CNN and Reuters.

The reaction in the Chinese state media was strong and among other things called the attack on Huawei a part of the US' strategy to contain China . A China Daily editorial used the headline 'Containing Huawei's expansion detrimental to US-China ties'. For a good overview of state media responses, see The Guardian . However, according to the SCMP China's foreign ministry spokesman denied a link between the arrest of Sabrina Meng and the trade negotiations. Trump's National Security Adviser, and ultra-hawk on China, John Bolton, on the other hand stated that Huawei would be a major topic in the talks, see transcript of interview with NPR. On Thursday, Japan announced that Huawei telecom equipment would be banned from state-backed projects, see Reuters.

That China would not link the case to the trade talks was apparently confirmed on Thursday, when the Ministry of Commerce said China would immediately start implementing agreements on agricultural products, energy and cars. The ministry spokesman also called the talks with the US 'smooth' and that China is 'fully confident' it will reach an agreement with the US within 90 days, see Caixin . In a tweet Thursday night, Trump followed up by quoting this message and said 'I agree!'. A Bloomberg story today says there is an internal debate in China on potential retaliation. The report says there is a division between those working on the economy, who want to separate the two things and those who deal with national security (normally more hawkish), who want to push back.

On Tuesday, China followed up on the ceasefire agreement with the announcement of strengthened punishments for theft of Intellectual Property Rights ( IPR ), see Bloomberg . China set out a total of 38 different punishments to be applied to IP violations, starting this month.