China announced on 5th March that its economic growth has been lowered to between 6% and 6.5% for the year 2019. Last year’s growth was 6.5%. So, if the country’s GDP this year hits the lower bracket of 6%, it would be the slowest pace of economic growth in almost three decades. The situation has to be bad enough for Beijing to also announce a major tax cut.

 

The latest tax cut will be worth a staggering 2 trillion yuan (US$298 billion; £226 billion; RM1.2 trillion). This means China, the world’s second-largest economy after the United States, is likely to experience a slow economy this year, hence the significant tax cut to boost spending power in the hands of consumers and companies.

 

News say Washington and Beijing might be close to an agreement to end the trade war which has caused havocs in the global financial markets. However, nothing is cast in stone. With a U.S. president like Donald Trump, it’s wise not to count the chickens before they hatch. After Trump walked away from Hanoi Summit, it’s possible that he could do the same to China.

Under pressure to win concrete concessions from North Korean Kim Jong-un, but ended with nothing, Trump walked away from a bad deal. While the U.S. president claimed the North wanted unrealistic demands for total sanctions relief, the hermit kingdom rubbished the claim, and held a rare news conference, saying they only asked for a partial lifting of the sanctions.

 

Of course, there’s a possibility that until a trade deal is reached, Beijing will not allow Kim to strike any deal with Trump.  U.S. Secretary of State Mike Pompeo said his boss will reject any U.S.-China trade deal that is not perfect. At the same time, the chief U.S. envoy, Trade Representative Robert Lighthizer, said the two sides still had much work to do.

 

Therefore, there’s a remote possibility that the present talks of a trade deal might not materialise at all, depending on how Trump wants to play the game and what type of toxic advises would be pumped by the president’s advisers. As the Chinese economy weakens, President Trump could be advised to take advantage of the situation to get more concessions.

Chinese officials made clear in a series of negotiations with the U.S. in recent weeks that removing tariffs on US$200 billion of Chinese goods quickly was necessary to finalize any deal. In exchange, China is offering to lower tariffs on U.S. farm, chemical, auto and other products. Specifically, China would buy US$18 billion in natural gas from Houston-based Cheniere Energy Inc.

 

China also pledges to speed up the timetable for removing foreign-ownership limitations on auto ventures, and to reduce tariffs on imported vehicles to below the current rate of 15%. In addition, the Chinese has also offered to ramp up purchases of American goods by US$1.2 trillion over six years, in particular agricultural ones (such as soybeans, corn and wheat).

 

However, there are other more important areas which Trump wants from Chinese President Xi Jinping. If Washington believes Beijing is desperate enough, the U.S. could put more pressure on the Chinese to meet demands to stop stealing intellectual property and allow American companies to operate in China without making joint ventures.

Trump administration could also demand commitment from Beijing to ensure Renminbi’s stability, in order to prevent competitive currency devaluations that would worsen U.S. trade deficit. Still, all these commitments and pledges would mean nothing if the Chinese were not sincere about keeping their promises, with plans not to honour them any time down the road.

 

Hence, the U.S. could demand enforceable structural reforms to put an end to intellectual property (IP) thefts and forced technology transfers. The U.S. also probably wants to eliminate China’s unfair practices, such as industrial subsidies, as well as regulations, licensing procedures and other practices that discriminate against U.S. businesses and give an unfair advantage to their Chinese competitors.

 

Although China has denied all the accusations, the U.S. nevertheless insists on establishing some sort of review procedures with tariffs in case Beijing violates any of the trade rules and practices Washington sets. In essence, this means the U.S. wants to monitor the Chinese. Worse, the U.S. also wants to control China’s monetary policy.

By claiming that the Chinese manipulate their currency, regardless of China’s denials, Trump may want to make it a condition that China reports its currency interventions. If North Korea were willing to go nuclear with the U.S. over its ballistic missiles, can anyone really believe that a great power like China would agree to such humiliating demands – allowing the Americans control over its economy?

 

Well, it doesn’t matter what you believe. As long as Trump believes he has the upper hand in demanding China to surrender what the U.S. wants, he could threaten to walk away if the Chinese refuses to comply. The U.S. president could be led to believe that American businesses could survive, even if the trade deal fails, because his tax cuts are sufficient to boost the domestic business.

 

However, as can be seen at the end of last year, there’s a catch if the president decides to walk away from a trade deal and let the trade war continues. The stock market would crash again. Donald Trump may not want the stock market to go down because he views the S&P 500 index as his performance index. When the S&P 500 dropped more than 9% last December, he quickly called it a glitch.

We’re talking about a frustrated U.S. president who had wanted to fire  Federal Reserve Chairman Jerome Powell for raising interest rates, which sent the Dow to its worst week since the financial crisis. So, if Trump is fed enough news about President Xi having trouble with China’s economy, he might walk away just to see if he can bring the Chinese to their knees.

 

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March 6th, 2019 by financetwitter

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