20-01-2020
The phase-one deal marks the peak of the trade war. Not all uncertainty is gone and the tech war continues but it offers breathing space for the Chinese economy.
GDP for Q4 was unchanged at 6.0%. However, industrial production points to an improvement in Q1. Policy stimulus is set to fade.
CNY continues its strong rally as a lighter mood pushes up inflows.
Phase one deal offers breathing space, phase two more difficult
We finally got a signature on a US-China trade deal after 1.5 years of tough trade negotiations. The actual agreement was released and the main news was details on which goods China is required to buy from the US. Compared with the 2017 level, China has to buy an extra USD77bn in 2020 and an extra USD123bn in 2021. This puts the target for 2021 at USD308bn, an increase in US exports to China of 60% from 2017 to 2021. On top of the Chinese purchases, the US achieved more protection of intellectual property rights, a ban on technology transfer, an opening up of financial services, a currency agreement and a dispute resolution mechanism (see Fact Sheet ). In return, China saw US tariffs on USD120bn of goods roll back from 15.0% to 7.0%.
Like the salesperson he is, Donald Trump stated at the signing ceremony that 'This is the biggest deal anybody has ever seen '. Perhaps unsurprisingly, Democratic Presidential candidate Joe Biden lambasted the deal , stating that 'China is the big winner of Trump's phase-one trade deal '. Chinese Vice-Premier and chief negotiator Liu He called the deal 'win-win ' and underlined that the concessions made would be available to other trade partners as well.
Comment: The phase-one deal offers benefits for both sides. Trump has made sure China will buy a lot of agricultural goods ahead of the US election, a key focus for him, as farmers in some important swing states have been among the biggest victims of the trade war. On the surface, China does not gain much. The rollback of tariffs was quite small. However, China achieves some breathing space for the economy in 2020 and the US can divert the goods China will buy from other trade partners. The concessions are all in China's own interest, as it wants to be an innovation society, which is possible only with the protection of property rights. Opening up financial services will also increase competition and add financing options for Chinese companies. China also achieved some certainty that a further escalation will not happen, at least in the short term.
There has been doubt about whether China can buy enough US goods to live up to the deal. However, while the amounts sound big, the increase in 2020 corresponds to only 4% of total Chinese imports , which were USD2,000bn in 2019.
