Ahead of Trump-Xi summit, China seen as having more to lose from prolonged trade war

It’s said that there are no winners in a trade war. But as US President Donald Trump and Chinese President Xi Jinping prepare to meet in Buenos Aires this weekend, the consensus is that China will sit down in a weaker economic position.

However, most analysts agree that neither side has much to gain from prolonging the conflict.

“China’s in a much weaker position, but that doesn’t mean the US is in a strong position,” said Richard Duncan, an independent economist and publisher of the video-newsletter Macro Watch.

“Its economy could also be thrown into a very severe crisis through a [prolonged] trade war with China, while China’s economy could completely implode.”

Expectations are measured as to whether a deal can be struck to end the trade war, which is set to escalate in January, when US tariffs on Chinese goods are expected to increase from 10 per cent to 25 per cent in the absence of a “ceasefire” agreement between Trump and Xi.

“It’s hard to reach an agreement at the G20 summit,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank. “The most likely scenario is that both agree to have further talks, so that the 25 per cent tariffs on US$200 billion of Chinese merchandise can be postponed and the tension can be de-escalated.”

Rod Hunter, a Washington-based partner at law firm Baker McKenzie and former senior director at the US National Security Council, said some sort of deal is likely, but not with much substance.

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“I expect that the odds are high for some sort of ‘deal’ at the end of the month, but any such ‘deal’ would likely be just a new phase, not the end or even the beginning of the end of the US-China trade dispute,” adding that there are important voices in the administration who remain sceptical.

“Any deal will probably be something of a standstill while further discussions are had, but it is not clear how long any such deal will hold.”

Assessing China’s hand

Most analysts agree that, so far, the direct impact of the trade war has been minimal.

Larry Hu, chief China economist at Macquarie Capital, predicts that China’s economic growth will slow to 6.2 per cent in 2019, down from 6.6 per cent this year. He attributed the downgrade to slower global economic growth and a domestic property market slowdown, rather than the direct implications of the trade war.

Xie Yaxuan, chief macro analyst of China Merchants Securities, wrote in a research note that the impact of the US-China trade friction on the real economy will show up in the first half of 2019 and that it will be difficult for existing policies to offset the downward pressure.

But Xie said that the Chinese government can take measures such as cut the banks’ reserve requirement ratio or reduce interest rates to mitigate the impact the trade war might have on China’s trade and exports.

There are other indicators, however, that do not bode well for China’s midterm economic health.

“The deterioration in China’s October Purchasing Managers’ Index (PMI) numbers emphasises slowing growth momentum. Indeed, our fear that weaker confidence is a self-fulfilling prophecy may be materialising,” said Jeff Ng, chief Asia economist at financial analysis firm Continuum Economics.

“A sharp slowdown in growth momentum to 6 per cent and below will likely be a huge concern, both domestically and internationally,” Ng added. “In such a scenario, Chinese authorities are likely to broaden policy support and sacrifice long-term policy goals in the process.”

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November PMI data is due for release on Friday, the day before the Xi-Trump meeting. Analysts expect the manufacturing sentiment index to remain steady at 50.2 in November, just above the 50 mark that separates expansion in the sector from contraction, according to a Bloomberg survey.

Assessing the US hand

While Washington faces less trade war-related pressure in the short term owing to an economic expansion fuelled by Trump’s tax cuts, recent weaknesses in US stock markets suggest the country’s economy is more vulnerable to a protracted tariff battle, according to US-based analysts.

“US growth was faster in 2018 than 2017 while China’s was slower, so in that sense the US is in a better position,” said Derek Scissors, an economist with the American Enterprise Institute, a Washington-based conservative think tank.

“However, as we near the scheduled January 1 escalation of American tariffs on China, asset market sentiment in the US has weakened the same way it weakened in China earlier.”

Trump has frequently referred to stock market prices in the two economies to argue that Washington has the upper hand in the trade war.

“We’re seeing some warning lights in both economies,” said Josh Green, co-founder of Panjiva, part of S&P Global Market Intelligence. “Here in the US we have stock market declines and a consensus that the stimulative impact of the tax cut is in the rear-view mirror.”

Despite Trump’s rhetoric about the performance of the US stock market, it would be more vulnerable than China’s stock market if the January tariffs take effect, said Steven Kyle, professor of economic policy at Cornell University.

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“The stock market will take a hit if Trump goes ahead and announces an increase to 25 per cent on a broader range of goods,” he said. “On the Chinese side, the effects are likely to be cushioned by a depreciation of the yuan – this has already happened to some extent and could continue.”

China’s yuan hit a fresh 10-year low at the end of October, after having weakened about 9 per cent over the previous six months, and has remained roughly at the same level since.

Kyle added the Federal Reserve is likely to increase its interest rate by another 25 basis points in December regardless of the trade war, with its main focus being rising inflation and strong employment growth.

“I believe that a peak in the business cycle is likely some time in the next two years,” he said.

Still, Washington has less to worry about than China’s policymakers, who are facing the tough choice between greater fiscal stimulus and economic reform priorities such as deleveraging, said Mark Wu, an expert on international trade and international economic law with Harvard University.

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“Because of the strong recent economic expansion, US economic policymakers have fewer short term systemic issues about which to worry,” he said. “And President Trump’s voters have been willing to tolerate the negative cost of a trade war given their support for his other domestic policies.”

Despite Trump narrowly winning the 2016 election using forceful rhetoric on trade, it’s unclear whether his hardline appeal can be sustained should the US consumer begin to get hit hard in the pocket.

Duncan, the independent economist, said: “If consumers begin to suffer because of higher inflation, it’s not at all certain that Trump will be re-elected in two years, in which case the trade war may not progress.”

Reporting by Jun Mai and Robert Delaney in Washington, Frank Tang in Beijing and Finbarr Bermingham in Hong Kong