Trump’s Narrow Window for Trade Wins in China
U.S. leverage in its trade dispute with China may be close to its peak
By Nathaniel Taplin
Right now U.S. leverage over China on trade looks strong, but the advantage may not last long.
U.S. PresidentDonald Trumpis considering much higher tariffs on Chinese imports than previously outlined—25% on the next $200 billion tranche of goods, rather than 10%. This reflects confidence in the U.S. negotiating position following news that the local economy is growing briskly while China’s is weakening. Mr. Trump also reached a detente with Europe in last week’s meeting with European Union PresidentJean-Claude Juncker,isolating China.
This could be as good as it gets for the White House. Chinese policy makers are moving more aggressively than expected to stimulate borrowing and spending. Given the usual two to three quarter lag before that shows up in growth numbers, any breakthroughs that could favor U.S. companies—such as a more open environment for foreign investment and tighter protection of intellectual property—may skitter away if they aren’t nailed down in the next nine months.
To see how quickly the policy picture is evolving in China, look at money-market rates. Weaning small banks off their dangerous dependence on short-term interbank borrowing was a key goal of China’s recent push to deleverage the economy. From mid-2016 to mid-2017, overnight borrowing rates rose by nearly a percentage point.
Now those rates are dropping fast, as policy makers worry that expensive bank funding is crimping small business lending, which smaller banks dominate. Weighted average bond-backed one-day borrowing rates, which were averaging 2.5% in June, closed below 2% on Wednesday. One-day bond repo volumes have skyrocketed, notching a new monthly high in July following steep falls in late 2016 and early 2017 during the height of the deleveraging push.
Banks are also receiving informal guidance from the People’s Bank of China to step up corporate lending. The central bank has reportedly eased capital-adequacy requirements for certain banks, which will make it easier to boost loan growth.
On the U.S. side, salad days of 4% growth and 2% inflation look hard to sustain. The Labor Department’s quarterly survey showed that civilian workers got their biggest pay increase in close to a decade over the year through June. Consumer price inflation, already hovering around the Federal Reserve’s target of 2%, may not be far behind. And the next tranche of threatened tariffs will hit industries that China dominates, meaning finding alternative suppliers to alleviate an upward squeeze on prices will be tougher. China supplies over 50% of U.S. imports across the affected sectors, according to Capital Economics.
President Trump’s window for a favorable deal with China is a narrow one. Investors should look for breakthroughs by early 2019—or not at all.
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