Chinese promises never delivered

China Reneged on Trade Commitments
By Ana Swanson and Keith Bradsher

President Trump is facing pressure to show that the pain of his trade war will be worth it for the companies, farmers and consumers caught in the middle.

WASHINGTON — President Trump’s top economic advisers on Monday accused China of reneging on previous commitments to resolve a monthslong trade war and said Mr. Trump was prepared to prolong the standoff to force more significant concessions from Beijing.
Mr. Trump, angry that China is retreating from its commitments just as the sides appeared to be nearing a deal and confident the American economy can handle a continuation of the trade war, will increase tariffs on $200 billion worth of Chinese goods on Friday morning, his top advisers said.
“We’re moving backwards instead of forwards, and in the president’s view that’s not acceptable,” his top trade adviser, Robert Lighthizer, told reporters on Monday.

“Over the last week or so, we have seen an erosion in commitments by China.”
Mr. Trump’s last-minute escalation highlights his administration’s difficult political position as it tries to fend off criticism that he has not been sufficiently tough on China. 

The president is facing pressure to show that the pain of his trade war will be worth it for the companies, farmers and consumers caught in the middle. 

Mr. Trump’s decision to upend an agreement that many expected to be finalized this week in Washington appears to be a political calculation that staying tough on China will be a better proposition in the 2020 campaign.
Fueling that decision is the president’s growing confidence that his trade policies are bolstering the American economy, without any downside. 

Mr. Trump and his advisers have seized on strong first-quarter economic growth as vindication that their tough approach to trade is accelerating the economy, and putting the United States in a stronger position than China to withstand any blowback from higher tariffs. 

Gross domestic product surged past forecasts in the first quarter, rising 3.2 percent on an annual basis in part because of a sharp slowdown in imports.
Steven Mnuchin, the Treasury secretary, attributed the strong growth to Mr. Trump’s economic policies, including on trade.
“There’s no question that some of the trade policies helped in the G.D.P. number,” Mr. Mnuchin said.

American investors seemed to back Mr. Trump’s position on Monday, as markets opened lower but then largely shrugged off Mr. Trump’s threat to raise tariffs on $200 billion worth of goods to 25 percent on Friday and eventually tax an additional $325 billion worth of Chinese products.
A final trade agreement could still be reached. 

Mr. Lighthizer and Mnuchin said on Monday that the Chinese delegation had not canceled travel plans to come to Washington on Thursday and Friday for negotiations.
“We’re not breaking up talks at this point,” Mr. Lighthizer said.
Mnuchin said the United States would reconsider imposing higher tariffs on China if the negotiations got “back on track.” 

He added that negotiators had been optimistic in the past about the prospects for a deal and had been planning for a summit meeting between Mr. Trump and Xi Jinping to finalize the deal.
But Mnuchin said it became “particularly clear over the weekend” that the Chinese had moved negotiations “substantially backwards.”
China, which depends on the United States economy for trade, said on Monday that it still planned to send a delegation to the United States this week for talks, though a spokesman for the Chinese Foreign Ministry declined to specify whether it would include Vice Premier Liu He, who has led the talks for the Chinese.
The threat of additional tariffs poses a major problem for Xi, who had been counting on a trade deal to keep China’s growth engine humming.
China’s economic growth began to slow last year as Beijing tried to tame the country’s overreliance on lending. 

President Trump’s initial tariffs last year hurt Chinese manufacturers and consumer confidence, worsening the slowdown. 

China’s economic slowdown limited Xi’s options to retaliate against American tariffs and put pressure on him to reach a deal.
In recent months, thanks in part to new lending, China’s slowdown appeared to stabilize. 

The prospect of a trade deal also increased consumer and investor confidence and led many economists to project that China’s growth would improve.
New tariffs could derail that progress.
“If tariffs are hiked this Friday and new tariffs come soon after that, the biggest negative impact will likely occur in the next few months,” Tao Wang, an economist specializing in China at UBS, said in a research note.
She estimated that a full-blown trade war with the United States could cut China’s economic growth rate by 1.6 to 2 percentage points over the next 12 months. 

That would be a considerable cut: Last year, China’s economy grew 6.6 percent, according to official figures, and the government has set an official target of 6 to 6.5 percent this year.
On Monday, Mr. Trump repeated his insistence that China rebalance its economic relationship with the United States and end its role as a net exporter of goods.


Donald J. Trump
✔@realDonaldTrump
The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade. With China we lose 500 Billion Dollars. Sorry, we’re not going to be doing that anymore!

The decision to up the ante came after Mr. Trump’s trade advisers made a short trip to Beijing last week. 

Mr. Lighthizer returned from that visit dismayed by China’s refusal to mention commitments it had made to update various Chinese laws in the final text of the trade agreement, people familiar with the situation said. 

Even Mnuchin, who has been more optimistic about the prospects of a deal, was dismayed that the Chinese were not doing more to reach an agreement.
Instead, Chinese negotiators had insisted that any concessions would need to be achieved through regulatory and administrative actions, not changes to Chinese law passed through its legislature. 

The provisions included the forced transfer of technology from American companies to Chinese firms.
Chinese negotiators have also continued to insist that Mr. Trump lift the tariffs he has placed on $250 billion worth of goods more quickly than the administration wants. 

With the two sides still disagreeing over issues including how China subsidizes its companies, its restrictions on data transfers, its approvals of genetically modified seeds and rules for foreign cloud computing companies, the president concluded late last week that China’s offers were not good enough.
On Sunday, Mr. Trump’s tariff threats drew praise from both sides of the political aisle.
“Hang tough on China, President @realDonaldTrump,” Senator Chuck Schumer of New York, the Democratic leader, said on Twitter.
“Excellent decision by @realDonaldTrump!” Laura Ingraham, a Fox News host, tweeted, which the president retweeted onto his feed. 

“No other president has had the guts to take on the China challenge.”
Mr. Lighthizer said on Monday that the United States was targeting some “very pernicious actions” by the Chinese, and that reversing them would have an enormous benefit for the American economy and the world. 

He also pushed back against reports that the evolving agreement would do little to address China’s subsidization of key industries.
Analysts have questioned whether volatility in the stock markets could change the president’s mind. Mr. Trump’s tariff threats caused markets in Asia to plummet Monday morning, but in the United States, the S&P 500 index closed down 0.45 percent, while the Dow Industrial was down just 0.25 percent.
It was unclear whether markets viewed Mr. Trump’s tariff threat merely as a negotiating tactic. 

The president has turned to tariffs as a source of leverage to bring other negotiations to the close. 

In talks last year over the North American Free Trade Agreement, Mr. Trump threatened to leave Canada out of the deal entirely and strike a deal with Mexico, a gambit that brought negotiations to a rapid conclusion.
In a note on Monday, Joshua Shapiro, the chief United States economist for MFR, an economic research firm, said his forecast and most others assumed that the United States-China trade talks resulted in no further damage, at a minimum. 

China walking on a tightrope as foreign investors flee

By Ambrose Evans-Pritchard

Foreign investors are fleeing Chinese markets.

THE Chinese yuan has fallen to the lowest level this year against the US dollar after the People's Bank opened the monetary spigot to avert an economic slowdown.
It raises the spectre of capital outflows and a potential currency scare akin to late 2015 if the dollar keeps rising.

The slide in the yuan exchange rate over recent days comes as global investors start to vote with their feet, no longer viewing China as a "safe haven" impervious to trouble sweeping other emerging markets.
The currency has been falling since early April but the pace has picked up sharply, weakening by almost 3 per cent to 6.55 against the dollar over the last seven trading sessions. 

It is a large move for a carefully managed currency, comparable to the sort of shift that set off trouble three years ago.
Hans Redeker, currency chief at Morgan Stanley, said the latest fund data shows that foreigners are liquidating investments in Chinese assets made in the last year through the Shanghai-Hong Kong Connect.
"A significant amount of money went in and now it is coming out again. The big currency moves we have seen recently are foreign outflows from China through 'Connect'. The scale is nothing like 2015 because the capital account is closed, but China is seeing some of the emerging market syndrome," he said.
The People's Bank cut the reserve requirement ratio (RRR) for banks by 50 basis points to 15.5 per cent over the weekend, injecting over $US100 billion ($135 billion) of liquidity into the financial system. 

It is different from an earlier reduction in April, carried out for technical reasons.

"The RRR cut is a clear sign of policy easing amid strong headwinds. We believe the Chinese economy has yet to bottom out, and the situation could worsen before getting better," said Ting Lu and Wisheng Wang from Nomura.
The Chinese authorities appear concerned that the crackdown on shadow banking and excess credit launched in 2017 may be kicking in a too hard, with a delay. 

The People's Bank (PBOC) has already been easing quietly by steering down interbank interest rates.
While the RRR cut happened to coincide with the escalating tit-for-tat trade war with US, it had far more to do with concern over rising default rates and the slump in business investment. 

"The bigger threat to China's economy this year has always been the delayed impact of last year's policy tightening," said Capital Economics.
Last week the PBOC announced the creation of a special "financial risk tracking unit" to monitor local and global conditions after a surge in corporate defaults. 

Beijing is quietly orchestrating a rescue for HNA Group, saddled with $US94 billion of debts. 

The Shanghai Composite index of equities has fallen to a two-year low of 2,859.
Simon Ward from Janus Henderson says the growth rate of the M1 money supply has plummeted to 6 per cent from a 25 per cent peak in mid-2016 when the central bank opened the floodgates. "Monetary trends are unambiguously weak," he said.
Nomura said it expects a blast of easing measures over coming months. 

These include a further 100 point cut in the RRR, higher commercial bank quotas, and a fiscal boost for local governments.
The risk for China is that the central bank is loosening just as the US Federal Reserve tightens hard to head off incipient inflation in the US economy. 

The Fed has sketched a faster pace of rate rises. 

It is also draining global dollar liquidity relentlessly, with plans to reverse quantitative easing by $US50 billion a month from September onwards. 

The hawkish US policy is pushing up the US dollar. 

This creates a toxic dilemma for the Chinese. 

If they loosen policy too much to shore up their economy they risk a rapid slide in the yuan, unsettling Chinese investors and triggering capital outflows.
The experience of 2015-2016 showed that this can get out of hand. 

The exodus reached $US100 billion a month. 

The PBOC ran through a quarter of its $US4 trillion of foreign exchange reserves. 

The trauma is seared in the memory of China's economic leadership. 

It is why Beijing is extremely unlikely to devalue the yuan as a way to retaliate against President Trump's trade tariffs.
"They will absolutely not think of doing that," said Geoffrey Yu from UBS, son of a former PBOC rate-setter.
The China currency scare two years ago ended when the Yellen Fed came to the rescue and suspended its tightening cycle, buying precious time for the Chinese authorities to restore control and launch a fresh mini-boom. 

The circumstances are entirely different today. 

The US is closer to overheating. 

The Powell Fed is more hawkish. 

The Trump Treasury will not lift a finger to help this time.
China risks finding itself caught between a rock and a hard place, or facing an "Irreconcilable Duo" in economic argot. 

While it is unlikely that the country will have to tighten "pro-cyclically" into a downturn -- as Argentina, Turkey, and several others are already having to do -- it may well find that it cannot loosen much either without risking a currency crisis. 

The PBOC is walking a tightrope.