The ongoing rumbling trade war between the US and China is set to continue while negotiations ramp up in intensity. With a Chinese delegation currently in the US and prolonging its stay in an attempt to circumvent a mass increase of current US tariffs on Chinese goods from 10% to 25% (due to kick in on the 2nd of March) if no agreement is reached, more and more factors are being piled onto the negotiating table in an attempt to strike a deal and bring an end to last year’s punitive tariffs which both sides imposed on each other.
In the latest from Trump, indications seem to show that a deal is more likely to occur than not and the President indicated yesterday that the current charges against Huawei (both the company and senior executives) may be tabled for discussion with the Chinese trade delegation. In some ways this has been a slightly confusing period given that the US intelligence community has been pushing allies to move away from Chinese technology for their key telecoms infrastructure, a prospect made slightly tricky given that Huawei is the largest telecoms manufacturer in the world, combined with the UK’s assessment this week that the risk of using Huawei equipment can be effectively mitigated to ensure it is not a problem (read our coverage of that here).
This, coupled with President Trump’s tweets about 5G and even 6G(!) indicate that although the US intelligence services may perceive Huawei as a threat and an extension of the Chinese Communist Party’s spying regime, the President seems to feel otherwise and that may be good news for the possibility of a trade deal.
US – China Trade War – What it’s Really About
Headline articles which have emanated from the discussion in recent times include that China will purchase 5 million tons of additional soybeans from the US as well as “stop” currency manipulation (which is at this stage entirely unclear as to what that specifically means) are missing a large part of the point. US farmers will take some heart from that news of course given reports that approximately 25 million tons of American soybeans will go unsold in 2019 if the trade war continues 2018 cost US farmers approximately $8 billion).
Even so, the USDA’s chief economist Robert Johansson recently remarked that “The record high stocks in the US due to the trade situation will take several years to unwind, which will weigh on US prices going forward even with potential Chinese purchase agreements” signalling continued pain for the US agricultural industry.
But although these kinds of stories make for good headlines, what is really at stake is China’s technological rise and Huawei as well as ZTE have been significant players in this respect. Structural economic reform is viewed as unlikely to go anywhere near far enough from a western perspective and the current Chinese policy of requiring western companies to form joint ventures with Chinese ones to gain access to Chinese consumers and markets is viewed as detrimental to western intellectual property and therefore long term competitiveness.
While it’s likely possible to gain Chinese agreement on short term measures aimed at reducing the current trade deficit (which is already an inappropriate number on which to base discussions given that much of the value chain accrues to American companies anyway), the move to a free-floating Renminbi is likely seen as inevitable in the medium to longer term and probably less of a concern once Chinese technological supremacy is more established than it is today and more of the Chinese economy is geared towards taking advantage of that technology.
The Chinese Economic Balancing Act
China’s economic growth in recent times has long been speculated to have been driven by a reasonable degree of sub-prime lending. Given that sub-prime lending in the US on a large scale is what led to the global financial crisis in 2008, this kind of behaviour should not be underestimated in its potential impact. Suspicion of a debt black hole in the Chinese economy is rife and if it is pushed to a tipping point, the likelihood that it could implode is reasonably high and if this were to happen, it would likely lead to some degree of global contagion.
Signs of this have started to become more apparent over the last year with the People’s Bank of China loosening rules around capital requirements for its banks not once, but twice. A sure sign that the trade war with the US has begun to bite into the Chinese economy (along with worsening earnings reports pointing at a slowing China from American companies like Apple NASDAQ:AAPL and NVIDIA NASDAQ:NVDA).
Allowing commercial banks to issue perpetual bonds (a practice already used in many western countries) to replenish tier one capital, as well as the PBOC lowering the structural and pro-cyclical contribution parameters will both allow Chinese banks to lend more without suffering in the PBOC’s bank stress test ranking scenarios.
If the trade negotiation pushes China too far, it may be that the economy starts to struggle more which could lead to wider problems. The Chinese delegation will need to make sure it maintains Chinese economic growth while both satisfying the US that it has done what is needed to prevent further tariffs and ensuring it can continue with its long term growth of the Chinese technology sector. A high wire balancing act if ever there was one.
The post Trump Considers Negotiating Huawei Charges in Trade War by Adrian Ip appeared first on Wccftech.
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