- High-level trade talks on track for week starting 7 October.
- Elevated US-China tensions create difficult conditions to reach a real deal.
- Chinese stocks and the CNY gave back gains in sign of caution ahead of the talks.
- PRC’s 70-year anniversary is celebrated on 1 October. It will be a demonstration of economic achievements as well as military capabilities.
Trump lashes out at China again in UN speech
“They want to make a deal very badly… It could happen sooner than you think “. The comment came from US President Donald Trump on Wednesday and got a positive spin in some media. However, looking at what he said in the same session made it look less positive: “You know they want to make a deal and they should want to make a deal. The question is, do we want to make a deal?”
The day before he lashed out at China in a speech in the UN. He proclaimed he would not accept a “bad deal ” and in blunt terms stated that “not only has China declined to adopt promised reforms, it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers and the theft of intellectual property and also trade secrets on a grand scale. ” Trump also said the US was watching the situation in Hong Kong carefully.
China rebuked the speech through state media and foreign minister Wang Yi said in a speech in New York, that “negotiation cannot take place under threat at the expense of China’s legitimate right to development “. Wang also said “seeking hegemony is not in our DNA ” and that China has “no intention to play the Game of Thrones ” on the world stage. China strongly condemns what they see as US meddling in domestic affairs in Hong Kong. Referring to this issue foreign ministry spokesman Geng Shuang said at a press conference that “any move made by Washington to undermine China’s interests will receive a forceful fight back from Beijing.”
On a more positive note, this week China has resumed buying soybeans from the US on a limited scale and the US exempted 400 goods from tariffs.
Comment: We believe both sides are interested to strike an interim trade deal, where China buys agricultural products like US soybeans and pork and Trump postpones some tariff increases (see our weekly last week). However, the overall atmosphere between the two countries is far from good and it leaves difficult conditions to strike any bigger deal. The hands of China’s negotiators are tied by domestic resistance to go any further than where it ended in May. And Trump and his team, led by China hawk Robert Lighthizer, is sticking to demands that China cannot accept. Hence, the deadlock and why there are no signs the two sides are any closer to a real deal. Maybe it changes when we get closer to the US election and Trump is more eager to strike a deal. But for now it seems too early for that.
Chinese stocks and CNY give up gains
The Chinese stock market lost some steam this week following a strong August and early September. We believe it reflects profit taking and hesitancy ahead of the crucial trade talks in October. An interim deal should be positive for stocks as it dampens the risk of further escalation. On the other hand, a failure to reach an interim deal could result in higher US tariffs on 15 October (as scheduled), which would be a reminder of the difficulty of striking a deal. It would also reignite fears of further escalation. The CNY also gave up some of the gains seen lately (chart on front page). It was partly also due to overall USD strength as it is usual for USD/CNY to move higher when the USD index increases as has been the case this week. While growth has also softened in the US, it is still the strongest pillar in the global economy, which is reflected in more USD strength.
Comment: We expect the Chinese stock market to continue to trade without clear direction in the coming months. Investors are sitting on the fence to find out whether we are heading for a full-blown trade war and recession, or a trade deal that would most likely lead to an economic recovery and give a boost to markets. We are still positive on Chinese stocks in the medium to long term as we expect the economy to weather the trade war storm and eventually get back on its feet during 2020. When it comes to USD/CNY, we look for more range trading around 7.10-7.20 in the short term. We still project the cross at 7.20 on a 12M horizon as our baseline scenario is no deal before the November 2020 US election. But also no material escalation of the trade war.
China celebrates 70-year anniversary of the People’s Republic
On Tuesday next week, Beijing will host a comprehensive celebration of the 70-year anniversary of the People’s Republic of China (PRC). On 1 October 1949, the first leader of PRC, Mao Zedong, proclaimed the founding of the Republic. It followed victory of the Communists over the Nationalists (KMT) following many years of civil war. Comment: The celebration will illustrate China’s pride over its economic achievements over the past decades as well as underlining China’s increased military power. A parade is said to reveal new military equipment. It will show to the Chinese people and the world that China is determined to never again experience a ‘century of humiliation’ as was the case from 1840-1949, when among other things, some parts of China were occupied by foreign forces and China was forced to sign ‘unequal trade treaties’. In a speech China’s President is set to repeat the goal of Chinese rejuvenation in the decades to come and thus achieving the Chinese Dream. But he will probably also repeat that China does not aim for hegemony but will work for a multipolar world. In the US; the day will be another reminder that China is on a steadily rising path – both economically and militarily.
Other China news this week
China opens huge new airport in Beijing shaped as a starfish. The Daxing airport is designed by the Iraqi-British architect Zaha Hadid and is said to be the world’s largest terminal in one building.
The US puts sanctions on Chinese companies over Iran
China tech news of the week:
- Baidu begins robotaxi pilot service in Changsha.
- Chinese chip makers speed up plans to list on the STAR market as China pushes to wean itself off reliance on the US chip industry.
- Huawei launches its’ first smartphone without Google apps due to the US ban.
