United States October 14, 2019 / 02:24 am UTC

U.S./China: A Partial Deal Still Needs More Details

By Jeff Ng

The U.S. and China reached an initial agreement in principle on trade on October 11. U.S. President Donald Trump has agreed in principle to suspend October tariffs due to the progress. We think that that is helpful against further deteriorating relations, but the situation remains vulnerable to changes. 

The proposed deal covers agriculture, currency and some aspects of intellectual property protections. However, officials are set for further discussions on the details.

China has ramped up on agricultural purchases near-term, partially as a concession and also from its own needs. The U.S. Department of Agriculture announced net sales of 142,172 tonnes of U.S. pork to China in the week ended October 3. This sets a record largest weekly sale. 

Next steps will be for a finalized agreement to be set in stone, perhaps by a signing of the deal by Presidents Trump and Xi Jinping. 

Another key event to watch will be a potential U.S.-China meeting on November 16, during the Asia-Pacific Economic Cooperation summit, which both presidents are scheduled to attend.

The biggest positive in our view is that the U.S. is not proceeding with a 5ppt hike to 30% on tariffs on $250 billion of China exports on October 15. Already, the damage has been done to China’s economy, with GDP growth set to slow to 6.1% y/y in Q3, from 6.2% in Q2

We think that there remains work to be done before a clear trend of de-escalating tensions start to form. We do not see the deal as hunky-dory U.S.-China relations, more like a truce against further escalations in protectionism. 

Market positivity should help to limit near-term weakness in the CNY against the USD. There is now a reduced possibility that our USD/CNY end-2019 forecast of 7.20 will be breached.

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