It was always going to be virtually impossible for China to keep its side of the "Phase 1" trade deal. After unleashing Covid-19, it certainly is now.
This may not be the time to push the trade deal, although President Trump is attempting to do exactly that. Instead, it's likely time to push China on other issues: Taiwan's long-overdue membership of the World Health Organization, for instance, and the United Nations while we're at it. Island building in the waters of Southeast Asia. Its terrible human rights record, and the concentration camps for Muslims in Xinjiang, on China's western edge. Don't forget democracy here in Hong Kong!
Trump is still clinging to the idea that China is going to buy an extra US$200 billion in U.S. goods and services. Left holding a trade marriage that exists only on paper, the president is sounding like a jilted lover. He is revising his January assessment that he and Chinese counterpart Xi Jinping "love each other."
"I have a very good relationship" with Xi, Trump said in an interview taped Wednesday with Fox Business Network. "But I just - right now, I don't want to speak to him."
What happens when a bromance goes bad? It seems we are about to find out.
The prospect of January's deal falling apart is rattling markets. The CSI 300 index of blue chip stocks in Shanghai and Shenzhen lost 1.3% this week, ending Friday down 0.3%. That's the worst week since mid-March, when Covid concerns in China were at their height.
Hong Kong shares fell 1.8% for the week, with a slight 0.1% dip on Friday. After the market closed, we got the confirmation that the Q1 economy shrank 8.9% in Hong Kong, compared with Q1 GDP in 2019, the worst quarterly drop since records began in 1974.
China has for the first four months of the year purchased 3% less in U.S. products than it did the same time last year, according to the China Daily. It has this week started buying U.S. soybean oil and allowed the import of U.S. barley and blueberries, and appears keen to speed up the purchase of other farm goods.
Trump is taking China's difficulties to heart. "I make a great trade deal, and now I say this doesn't feel the same to me," he said. "The ink was barely dry, and the plague came over. And it doesn't feel the same to me."
The love is gone. So sad. What do you do when a relationship ends?
"There are many things we could do," Trump said. "We could cut off the whole relationship," which he said would "save US$500 billion." That's roughly the U.S. annual imports from China, so the simplification neglects that U.S. companies and consumers get a lot in return.
It's so hard to just move on. Can Trump ever find another China? Another Xi? His head may say "Sure, there's other superpowers in the sea", but his heart knows better.
Trump is still holding out hope for his old flame. "They will buy US$250 billion," he said, either seeming to forget the agreed US$200 billion, or rather optimistically marking it up.
S&P ran a report this week that we will see the "U.S. and China Kick Trade Deal Can Down the Road." While Phase 1 is in trouble, both sides have good reason to stick with it for now, the rating agency believes.
The US$200 billion figure was always supremely optimistic to achieve. It's based on 2017 figures, before trade hostilities kicked off, when China imported US$186 billion in U.S. goods and services. Of the US$200 billion in new purchases, US$56.7 billion is supposed to be in U.S. services, US$78 billion on manufactured goods, US$52 billion in energy, and US$32 billion on farm goods.
To shift 2017 figures to US$386 billion would require a swing of about 1.4% of China's entire GDP. China's U.S. imports would have to rise by 4% every month, tripling from about US$8 billion per month to more than US$30 billion per month by the end of 2021.
Now, with China's economy struggling to restart, we can forget all that. As noted, China's U.S. imports aren't even matching the figures from 2019, which were already knocked by the trade war. S&P calculates that Q1 imports were down at least US$7 billion, or 25%, compared with 2017.
There's a clause in the trade deal that applies to the pandemic, though it doesn't explicitly allow breaking the deal. "In the event that a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely complying with its obligations under this Agreement, the Parties shall consult with each other."
As S&P says, "In other words, if either party is hit by a global pandemic it seems like a good idea for a chat." The ratings agency says the most likely outcome is a "fudge," an assessment I share. China will boost its purchase of farm goods that it wants anyway, fall short of the overall deal, the U.S. side will declare progress and victory, and everyone can go back to talking about the "best deal ever."
The Xi and Trump love affair could be back on, quick as that!
So Chinese stocks may not take much more of a trade-war battering. Chinese blue chips are actually Asia's best performers in 2020 so far, amazing considering the origin of the Covid-19 pandemic in Wuhan. They have sold off twice this year, with their first plunge of 11.9% in late January.
But by early March, they had recovered that, and even edged ahead. They then sank 16.1% through March 23, the low for most markets worldwide, and have rallied 10.8% since then. As a result, the CSI 300 is down "only" 4.5% year-to-date. The only other Asian markets posting single-digit losses are New Zealand (-6.6%) and Taiwan (-9.8%).
China's industrial output rose for the first time this year in April, according to figures released on Friday. But it is going to be a long road back for the Chinese economy, which is not yet reflecting the plunge in export demand that's heading the way of Chinese factories after much of the developed world went into lockdown.
Industrial production shrank 1.1% in March but rose 3.9% in April, with official figures showing 99.7% of large and mid-size industrial companies have resumed production. That leaves analysts at Société Générale marveling that we have seen "a truly V-shaped recovery!" But not so fast. The Chinese consumer does not share the "optimism" of Chinese factories that have been press-ganged back into business. Retail sales pared their losses but still shrank 7.5% in April, after declining 15.8% in March. Those factories also aren't running at full capacity.
We will see how confident the Chinese leadership feels about the economic rebound. Next Friday will see the start of the National People's Congress annual meeting, a rubber-stamp parliament that's nevertheless a showcase event for the Communist Party.
It will, for once, be interesting to see what economic targets the party sets at that event. Normally, the growth rate has already been "predicted," but China will struggle to hit the growth of "around 6%" that it had been planning to announce. That proposed target has been endorsed by China's top leaders at the closed-door Central Economic Work Conference in December, according to Reuters, and was going to be announced at the parliamentary meeting in March. But the coronavirus forced the Communist Party to delay until May, and will surely also force a revised target for full-year growth.
The normal National People's Congress brings together more than 5,000 delegates in Beijing, who typically hem and haw for more than 10 days, but then pass what the top leadership wanted them to pass anyway. It's not clear how the meeting will be truncated this year, or if the full delegation will appear, but the meeting is expected to be the shortest in decades.