ANALYSIS: Phase One signing imminent; focus shifts to Phase Two

*PHASE ONE OVERVIEW

China’s Vice Premier Liu He has arrived in Washington for the much-anticipated signing of the US-China Phase One trade deal, with reports via WSJ suggesting that it will take place at the White House on January 15th at 11:30EST/16:30GMT/00:30HKT.

*THE NITTY-GRITTY

*China’s Currency Manipulation Status: US Treasury removed China from the currency manipulator list in its semi-annual report and said China made enforceable commitments to refrain from competitive devaluation in the Phase One deal, but also noted that China needs to take necessary steps to avoid a persistently weak currency. Sources familiar with the negotiations noted that the currency manipulator designation previously had no real consequences for China, albeit its removal was a symbol of goodwill from the US for Chinese officials. As a result of the overall optimism, CNY strengthened further below 6.9000 vs. the USD to levels last seen in July last year.

*China’s Agreed Purchases: Sources confirmed that the US-China Phase One deal will include a pledge by China to buy USD 200bln of US goods over a 2-year period. This is said to include USD 50bln in energy, USD 40bln in agriculture, USD 35bln-40bln in services and USD 75bln in manufactured goods. SCMP note that questions remain as to whether China can achieve the USD 40bln in agricultural purchases that the Trump administration is touting. China is yet to official confirm the buys.

* Sticking Points: The Phase One deal does include various advances on some sticking points. China Global Times noted that the deal text includes nine chapters, including IPR, technology transfer, food and agriculture, financial services, exchange rate and transparency, expanding trade, bilateral evaluation, dispute settlement and final agreement. US business executives suggested the Phase One deal is ‘modest but helpful’. That said, China has been tempering optimism surrounding the overall trade war with the US, stating that “it is not over yet” via its social media proxy Taoran, which is affiliated with the Communist paper used to manage trade talk expectations. “The US hasn’t revoked all its tariffs on China and China is still implementing retaliatory measures. There are still many uncertainties down the road” - Toaran noted, cited by SCMP.

*Enforcement: White House Trade Adviser Navarro asserted that the Phase One deal will allow the US to swiftly reimpose tariffs if it unilaterally determines that China has broken any of its commitments, including purchase agreements. China Global Times opinion tweeted that China will surely follow up its commitment to increase imports from the US once barriers such as tariffs and other administrative measures are lifted.

*Semi-Annual Review: The two nations have also agreed on semi-annual dialogue to push reforms in US and China and resolve disputes. This agreement is also poised to be announced on January 15th alongside the signing of the of the Phase One trade deal, according to WSJ. The new talks dubbed “Comprehensive Economic Dialogue”, will be separate from the Phase Two negotiations.

*PHASE TWO FOCUS

With the Phase One signing almost certainly taking place, market focus now shifts onto Phase Two, which is said to contain a lion’s share of the remaining sticking points. Some desks note that the Phase One deal signing seems to be more theatre than meaningful change – noting that the semi-annual review as a simple return to conditions seen in 2016, whilst the dropped currency manipulation status is likely a move to acquire leverage against China alongside the majority of tariffs being kept in place.

*Format: The actual format and timing of the Phase Two deal is not yet known. US Treasury Secretary Mnuchin alluded late last year that Phase Two negotiations will begin after Phase One is out of the way, but may be compartmentalised – “Phase Two may be 2a, 2b, 2c, we’ll see, but this is unto itself a huge accomplishment for the president”, Mnuchin noted.

*Timing: US President Trump last week he might want to wait till after the election to complete Phase Two China trade deal, but also said the US will begin Phase Two talks straight away. China Global Times, in response, tweeted that a Phase Two trade deal after November is too far away and added that China's willingness to start Phase Two negotiations depends on the implementation of the Phase One deal; citing an expert close to the Chinese Government. Furthermore, Global Times citing the expert close to the Chinese government, stated that China is not in a rush to begin Phase Two talks if US President Trump criticises the country during his election campaign.

*BRIEF HISTORY OF US-SINO DEVELOPMENTS – Link

14 Jan 2020 - 08:20- Important- Source: Newsquawk