Expectations Are Too High for China Trade Deal
Author: Greg Valliere
March 14, 2019
MOST ANALYSTS BELIEVE A CHINA TRADE DEAL is fully priced into the markets, which can mean only one thing — if there’s a wild card lurking, it would be the emergence of a negative surprise. While we expect a signing ceremony by later in the spring, the idea that a final pact can be completed by the end of this month is optimistic, to say the least.
CONFUSION INCREASED yesterday as President Trump proclaimed that he’s “in no rush” to finalize a deal, a tip-off that he’s lowering expectations. There are numerous sticking points — including intellectual property rights, the dominance of Chinese state-owned monopolies, and the most vexing issue of all: establishment of a credible enforcement mechanism.
BOTH SIDES NEED A DEAL: Former Trump adviser Gary Cohn said yesterday that the president is “desperate” for a deal for political reasons; we agree. And the Chinese reported dismal industrial output data last night, which probably will require more economic stimulus from Beijing, where fear of a slowdown persists.
WE THINK THE CHINESE WILL HOLD OUT on signing a deal until one is completely finished. Trump said yesterday that he would prefer a signing ceremony and then completion of the final details, but that seems like a non-starter for the Chinese, who surely recall the debacle when Trump and Kim Jong-un arrived at their summit with nothing finalized.
THUS WE THINK there’s a less than 50% chance of a Mar-a-Lago summit at the end of this month after Chinese President Xi finishes a trip to Europe, where he will get an earful; anti-Trump sentiment is viral there. Xi is highly unlikely to arrive in Florida unless a deal is 100% complete — and a deal most definitely is not close to completion now.
THE POSITIVES: Chances of a deepening and persistent trade war have diminished greatly; there’s a high likelihood of a deal this spring that will reduce tariffs and open Chinese markets, a plus for both countries. The resulting GDP rise may be relatively modest, but that’s not the point — the deal will reduce the risk of lower GDP and business uncertainty.
OUR ADVICE IS TO IGNORE, if possible, the confusing rhetoric from Trump and his advisers. He’s a master at creating suspense; like a reality TV show host, Trump knows how to boost ratings. So one day a deal may look finished; the next day the talks may seem stalled. In any event, be prepared for a delay — there’s probably not enough time to resolve all the outstanding issues in the next two weeks.
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