China Watch

Trump and Xi Meeting - Trade War Avoided, But North Korea Remains a Headache

Typography

While lacking surprises, the US-China meeting held last week managed to avoid a trade war between the world's two biggest economies. Donald Trump and Xi Jinping agreed on a 100-day plan on trade that aims at boosting US exports. Meanwhile, the North Korea issue has remained a deadlock. Trump's announcement to launch airstrike in Syria during the meeting, followed by the deployment of a US navy strike group near the Korean peninsula, is a call for China to take necessary measures to address North Korea's nuclear program. Intensified geopolitical tensions have continued to pressured Korean financial market with Korean won extending weakness for a 5th straight day against US dollar while the country's benchmark equity index, KOSPI, recording the biggest one-day selloff in 6 weeks.

US-China Trade Plan

It was reported that China would offer US better market access for financial sector investments and US beef exports. China would resume consideration of raising the investment ceilings in the Bilateral Investment treaty. Both parties agreed to increase dialogue in the future and attempt to diminish the bilateral trade deficit through increased US exports rather than reduced US imports. As Commerce Secretary Wilbur Ross noted, "given the range of issues and the magnitude, that may be ambitious, but it's a very big sea change in the pace of discussion… That's a very important symbolization of the growing rapport between the two countries. Comments from Chinese media regarding trade talks were also favorable. Global Times, China's state-owned media, described the meeting was constructive and should help pave the way for developing a cooperative bilateral relationship. It also highlighted that "the new mechanisms for four high-level dialogues" created during the meeting are "more comprehensive than the US-China Strategic and Economic Dialogue that emerged during the Obama era". On military matters, Global Times suggested that the Joint Staff Dialogue mechanism would "serve as another buffer to help avoid escalating friction that could lead to severe confrontations on a strategic level".

No conclusion on North Korea

Another key topic for discussion was North Korea. While no conclusion was made at the meeting, US deployment of a navy strike group towards the western Pacific Ocean, near the Korean Peninsula, was alarming to China. An article Zhang Jiadong, professor with the Center for Amercian Studies, Fudan University, cited by Global Times, indicated that Trump had taken a tough stance on some international affairs, referring to his action over Syria and imposition of pressure on the North Korean nuclear issue. He condemned that the US "is becoming increasingly selfish" and its "actions and rhetoric have posed many challenges for Beijing and created obstacles for China in keeping up its tempo with the US". The latest update of the matter was US Secretary of State Rex Tillerson's comment over Sunday that "China is beginning to recognize that this [North Korea's nuclear program] presents a threat to even China's interests". We expect Korean financial markets to remain under pressure in the near term due to heightened geopolitical tensions.