Optimism in China after US trade thaw but hard work just starting

Optimism in China after US trade thaw but hard work just starting

Beijing, China – A sense of relief spread across China as President Xi Jinping and his United States counterpart, Donald Trump, agreed over the weekend to a 90-day halt to new tariffs as the world’s two leading economies engage in new negotiations aimed at reaching a broader deal.

The smiles and friendly handshakes exchanged between the two leaders on the sidelines of a Group of 20 meeting in Argentina contrasted sharply with the testy exchanges and thinly-veiled animosity that had for months defined the US-China relations amid a bitter tit-for-tat trade dispute.

The news of the ceasefire, which will see the US not raise tariffs on $200bn of Chinese goods from 10 to 25 percent on January 1, as previously threatened, as well as prevent a potential retaliation from Beijing, was welcomed by investors in China and beyond.

“We dodged the next bullet … the markets were definitely happy,” said Andrew Polk, an economist with Beijing-based consultancy Trivium, citing the yuan’s strong advances in the immediate aftermath of the truce – the Chinese currency’s two-day gain of 1.7 percent on Tuesday was its biggest for more than a decade.

But immediate joy has since given way to “cautious optimism” as confusion over what was actually agreed between the two sides led to some gains being lost, added Polk.

Renewed duty threats by Trump, who on Tuesday called himself a “Tariff Man” on Twitter, did not help either.

“There’s a sense that’s there no time to pop the champagne – it’s time to get to work,” said Polk. 

Jacob Parker, vice president of China Operations at the US-China Business Council, agreed. While expressing the US business community’s satisfaction for the truce, he was quick to note that a long road lies ahead.

“This outcome delays further escalation and gets both sides back on track to find a sustainable long-term solution to the challenges in the relationship,” Parker said.

WATCH: US, China declare trade war ceasefire (02:23)

But others said the pause itself should not be underestimated.

Zhu Feng, a professor of international relations at Nanjing University, called the trade thaw an extremely positive development that offers a chance to avert a broader crisis between the two sides.

The conflict isn’t just about increasing tariffs, but also different ideas and positions taken by China and the US,” Zhu said.

“As the relationship worsens, the result will be more than just a trade war,” he added, pointing to the tighter controls on Chinese students heading to the US as an example of deepening hostility.

In June, the US State Department curbed visa lengths for Chinese graduates studying aviation, robotics and advanced manufacturing to one year from five, citing national security concerns.

“Growing negative sentiments between China and the US is the most frightening factor in China-US relations,” Zhu said. “So the temporary truce is really important to alleviate increasing opposition between the two countries.”

Shi Yinhong, a professor in Beijing’s Renmin University, had a more somber outlook. “It’s not a big deal. If negotiation fails after 90 days, things will get worse,” he said.

Shi argued that reaching a broader agreement depends on the flexibility of the US side.

“If Trump is very harsh with his demands, then meeting those demands would mean tremendous changes to China’s national affairs and industrial policies,” Shi said. “It will decrease the chance of the Chinese government accepting them.”

INSIDE STORY: Can the US and China resolve their differences? (25:00)

Many analysts see the tight, 90-day negotiating window as short when taking into account the US list of demands, which is believed to include requirements for China to act on issues such as forced technology transfer, intellectual property protection, non-tariff barriers and alleged cyber theft.

In a statement last month, the US Trade Representative’s office said China was continuing “unfair practices”, alleging that Beijing’s IP and technology transfer policies are causing multibillion dollar worth of damages to US companies.

“It is unreasonable to assume that all challenges in the relationship can be resolved in 90 days,” said Parker, adding that setting medium- and long-term targets, as well, is the best way to “ensure sustainable engagement between the two sides”.

Chinese action

Despite the persisting scepticism, the Chinese commerce ministry on Wednesday expressed its “confidence” that an agreement can be reached within the next 90 days.

“China will start with the implementation of the specific matters in which consensus has been reached, the sooner the better,” it said in a statement, without providing more details.

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Already, just days after the temporary ceasefire, China has announced a number of significant steps, including a slew of penalties for intellectual property theft that could restrict companies’ access to borrowing and state-funding. According to China’s National Development and Reform Commission, the 38 different punishments will be applied to IP violations starting this month. 

On the trade front, the White House says China has agreed to purchase more agricultural, energy, industrial and other products from the US. Trump also tweeted that China had “agreed to reduce and remove tariffs on cars coming into China from the US” – currently the duties stand at 40 percent. Details on this, however, have been scarce, and Beijing has not confirmed the move.

‘Negative sentiment’

Whether or not the US and China can transform vague commitments into concrete outcomes over the next 90 days, however, remains unclear. But what is certain, Shi said, is that stakes are high.

“If an agreement isn’t reached, there will be significant losses for China” and “damage done to both the US and Chinese economy,” he says.

So far, China has managed to avoid any major economic fallout from the trade war.

“Ironically, we’ve so far seen the opposite,” said Polk, noting how companies have rushed to pump up orders to beat tariff deadlines. “Of course, if we see the 25 percent in tariffs implemented this will turn on its head.”

“Most Chinese exporters say, ’10 percent is no big deal, we can eat that. But 25 percent, we’re going to have a problem with’. So far there hasn’t been much of a macro impact on China, but we could see one if the tariff hike happens,” Polk added.

Ultimately, China’s government doesn’t only have businesses to answer to. Trade tensions with the US are taking place against a backdrop of slowing economic growth and lower state revenue.

“The trade has increased the pressure on China’s economy,” Shi said. “And there are psychological impacts,” he said, referring to an increasingly worried Chinese population.

It’s a view echoed by Polk.

“Already, there’s this feeling of domestic uncertainty, policies not working, a hurting private sector  … and then you throw the trade war on top.

“It’s absolutely more of a very negative sentiment out there.”

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