Reports note U.S. and Chinese negotiators working on outline of deal to end trade war
— U.S./China trade policy update:
- Progress continues to be made, with Reuters reporting U.S. and Chinese negotiators have begun to outline a deal to end the trade war between the world's two largest economies. Citing sources familiar with the ongoing negotiations, Reuters said agreements in principle are being drawn up on six key areas: forced technology transfer and cyber theft, intellectual property rights, services, currency, agriculture and non-tariff barriers to trade. The report suggested the outline is the most significant progress made so far after months of trade talks.
- The two sides traded texts and worked on setting down obligations on paper. Reuters indicated the two sides made enough progress last week that extending the talks in Beijing was contemplated, but they instead opted to resume the negotiations this week in Washington.
- The two countries are also discussing an enforcement mechanism for the deal and were looking at a list of 10 ways that China could trim its trade surplus with the U.S. Those included agreements to buy U.S. agricultural products, energy products and items like semiconductors. Removal of tariffs on distillers' dried grains (DDGs) and ethanol are said to be among the products involved, according to Bloomberg, while Reuters reported that China could also reduce its tariffs on U.S. polysilicon, a core component used for solar cells. As for the enforcement mechanism, indications are it could involve the U.S. reinstating tariffs should China fail to fulfill terms of the deal. U.S. concerns have also been expressed over China using its currency to gain a competitive advantage over the U.S., something Chinese officials have insisted they will not do. But U.S. officials like Mnuchin have pressed the issue, warning China not to devalue their currency and want to see a stable yuan. Getting China to further open its financial services markets to more firms is also said to be a U.S. ask in the MOUs as U.S. firms remain unconvinced that China's regulatory structure in this area could still slow their access to the Chinese market.
- Cabinet-level officials today are set to join the prior mid-level discussions that took place the past few days in Washington. China’s Vice-Premier Liu He is the country's lead negotiator who will meet today and Friday with a team led by and U.S. Trade Representative Bob Lighthizer and Treasury Secretary Steven Mnuchin. Liu, a special envoy to Chinese President Xi Jinping, will be discussing a possible memorandum of understanding (MOU) to suspend the trade war between the two countries.
- Liu He, China’s chief negotiator, is expected to meet with President Trump tomorrow as efforts continue to extend the current March 1 deadline in order to allow more talks.
- A “trade deal is coming soon,” reports the South China Morning Post, but it adds, “ties between the two countries will never be the same as the U.S. challenges China’s rise for survival, a party adviser says." Speaking at the South China Morning Post’s annual China Conference, which looks at China’s opening up over the past 40 years and what lies ahead for the next 40, Xie Maosong, assistant to the secretary general of the China Institute for Innovation and Development Strategy, said he expected Beijing and Washington to hold further talks within the next three months based on agreements reached in Washington this week. "The U.S. won’t remove all of its tariffs as it wants to leave some room for negotiation,” he said. “There is likely to be another round of talks, and by June most of the tariffs on the US$250 billion worth of Chinese products will be lifted."
- An overall deal will not be finalized until President Donald Trump and Chinese President Xi Jinping meet in person, a meeting that has yet to be scheduled.
- Key unknowns include whether commodities/food products will be listed in a coming Chinese commitment of purchases, the quantity of such buys, and the timeframe for the purchases. These topics have changed during the ongoing talks, which is why contacts say the final Chinese commitments could surprise once they are officially unveiled. U.S. agriculture interests are monitoring the talks closely, given the importance that China has had as a destination for a host of U.S. commodities. Access to the market has been a friction point, including China's failure to fully utilize tariff rate quotas (TRQs) it established when it joined the WTO. The U.S. has challenged those actions at the WTO and indications are the U.S. is including that in the current negotiations. Quicker approval of biotech seed varieties is also said to be part of the mix besides additional purchases of U.S. ag goods like soybeans, corn and wheat.
- China is proposing that it could buy an additional $30 billion a year of U.S. agricultural products including soybeans, corn and wheat as part of a possible trade deal being negotiated by the two countries, Bloomberg reported, citing two people with knowledge of the plan. The offer to buy the extra farm produce would be part of the memoranda of understanding under discussion by U.S. and Chinese negotiators in Washington, according to the people, who asked not to be identified because the plans are confidential. Bloomberg reported the purchases would be on top of pre-trade war levels and continue for the period covered by the memoranda, they said. The offer to buy the extra farm produce would be part of the memoranda of understanding under discussion by U.S. and Chinese negotiators in Washington, according to the people, who asked not to be identified because the plans are confidential. The purchases would be on top of pre-trade war levels and continue for the period covered by the memoranda, they said.
- Enforcement of Chinese purchase commitments will be part of the package to give U.S. exporters assurance that Chinese pledges to buy various U.S. farm and energy products are acted on. If not, enforcement language would allow U.S. tariffs to follow.
- There’s a new fear surrounding the deal. According to a Wall Street Journal article (link), there are “growing concerns on the home front” in both America and China that their leaders — and President Trump in particular — are “going to cave in to the other side”: Some officials reportedly believe Trump is “tiring of the trade dispute and is poised to cut a deal that won’t lead to fundamental changes by China.” Meanwhile, the American Enterprise Institute China scholar Derek Scissors said that Lighthizer, a China hawk, holds significant leverage over Trump to keep to a hard line — “including, potentially, the threat of resigning if the deal falls short.”
- USTR Lighthizer to testify Feb. 27. The House Ways and Means has scheduled a hearing for next Wednesday on the U.S.-China trade dispute with U.S. Trade Representative (USTR) Bob Lighthizer. Lighthizer is known for detailed responses and it could be a good opportunity to get not only a top-level review of this week's talks with China, but also where he sees the road ahead.
- Chinese investors have a bigger worry than the U.S. trade war. The Financial Times reports concern about Chinese leader Xi Jinping’s approach to the economy is unsettling investors. Link to article (paywall). Beijing’s growing embrace of state-owned companies at the expense of the private sector is one concern, the article details, especially given the majority of jobs since Xi came to power in 2012 were generated from the latter. “That intensified when Xi did away with the two-term limit on the presidency,” the article notes. It concludes by observing the following: “Many of the business elite say they believe that while Trump is China’s enemy in the short term, in the long term he will, unwittingly, prove to be the country’s best friend. 'The reforms he insists on will be in China’s interest,' says one mainland private equity investor residing in Hong Kong. 'Ending subsidies for state-owned enterprises, enforcing intellectual property rights, these are all things Chinese reformers support but are too weak today to implement.' Given the change in approach from the White House and hardening in opinion inside Congress towards China, the flow of Chinese capital into the U.S. will probably subside whether the trade dispute is resolved or not. But, right now, it is the U.S. that is more in need of Chinese money than the other way round. And in the long run the trade battle holds bigger risks to the U.S. if one effect of China’s response is to make the country a better home for entrepreneurs.”
- Morgan Stanley Wealth Management has warned that markets are too optimistic about a resolution to the dispute, while another front in the trade war might open soon with relations between the EU and the U.S. continuing to sour.
- Russia exploits U.S.-China trade tensions to sell more soybeans, the Wall Street Journal reports. Commercial conflict has choked American soybean exports to the bean’s biggest market, China, providing Russian farmers an opportunity. Link to article.
— Trump continues to mull EU auto tariffs. President Trump said the U.S. would impose auto tariffs on the EU if a trade deal can’t be reached between the two sides. “We’re trying to make a deal, they’re very tough to make a deal with. If we don’t make a deal, we’ll do the tariffs.” Trump previously threatened support for levies of at least 20% on automobile imports. The president has 90 days from last Sunday to announce tariffs or other barriers, following a Commerce department study; he could extend the deadline.
— Focus on corn and the RFS mandate. Acting Environmental Protection Agency administrator Andrew Wheeler rejected a staff proposal to reduce how much ethanol needs to be blended into the fuel supply from 15 billion gallons a year to as low as 14.3 billion over three years, Reuters reports (link). The move may have implications for Wheeler as he faces confirmation to become the permanent head of the agency, if senators from oil-producing states withhold support.
— Dim Sums sizes up potential China corn imports. Most analysts think China “now has a substantial deficit between its production and use of corn which is being filled by dumping a purportedly huge stockpile into the market,” according to Dim Sums: Rural China Economics and Policy. But does that mean China will eventually become a major corn importer when the stockpile is depleted? “No one really knows for sure because every component of supply and demand is clouded by uncertainty,” the service says.
Background. Last fall, Chinese statisticians adjusted their estimate of corn production upward by 20% after discovering 42 million metric tons of additional corn they didn't know about. Dim Sums says the statisticians “claimed that the country produced 259 MMT in 2017-18, but the grain bureaucracy reported that only 98 MMT was purchased.” Authorities claimed to have auctioned off “an implausible 100 MMT of corn from implausibly large stockpiles during April-October 2018.”
“We know that China imports 2-to-3 MMT of corn,” the service said. “But imports of corn substitutes — sorghum, DDGS, barley, cassava and cassava starch — have fluctuated, affecting corn consumption to an unknown degree.” Imports of corn substitutes soared to 37 MMT in 2014-15, displacing an unknown amount of Chinese corn from consumption. Imports of substitutes fell 20 MMT during 2017-18 and 2 MMT during the first 3 months of 2018-19, “crimped by antidumping duties on DDGS, threatened AD duties and retaliatory tariffs on sorghum, and a threatened AD investigation of Australian barley. “
Chinese authorities announced ambitious plans to expand ethanol production nationwide by 2020, “but only marginal increases have actually occurred,” Dim Sums said. Industrial processing of corn was heavily subsidized during 2016-17 and less so during 2017-18.
“The blanket of fog over China's corn market is evident in a comparison of 2018-19 balance sheets by eight organizations that are all over the map,” Dim Sums stressed (see table). USDA, Ministry of Agriculture (MARA) and China National Grain and Oils Information Center (CNGOIC) have all adopted the 257.3 MMT production number officially announced by the National Bureau of Statistics. Others have lower production numbers. Estimates of corn use range from about 250 MMT to 310 MMT, “but these are all wild guesses,” according to Dim Sums. (MARA increased its estimates of both production and use by 40 MMT after incorporating the revised production number in January.) Most organizations expect moderate imports of 3 to 5 MMT. JCI expects “a whopping 14.5 MMT of Chinese corn imports. MARA “always low-balls imports early in the marketing year,” Dim Sums concluded.
China claims that its corn stockpile peaked at more than a year's production, and authorities made disposal of the stockpile one of their policy priorities over the last three years. All organizations expect a significant reduction in inventories in 2018-19 ranging from -5 MMT to -50 MMT. Dim Sums asks, “Does China really have a deficit between annual corn supply and use of 25 MMT or more — as MARA and CNGOIC estimate? If so, does that mean China will one day import that 25 MMT deficit when it finally depletes its corn stockpile?”
Most analysts agree that only a portion of the 100 MMT of corn auctioned during 2018 was actually used, and CNGOIC estimates that 45 MMT of it was carried over to 2018/19.
One recent corn outlook by Chinese analysts anticipates that this carryover will be one of several factors putting downward pressure on China's corn market this year. In May 2019 authorities are expected to start auctioning the estimated 79 MMT of corn that remains in the temporary reserve. The Ministry of Agriculture said they expect the reserve de-stocking to be completed this year. With potential buyers still holding 45 MMT of last year's auctioned corn and another 257 MMT corn harvest, “auction prices will have to be set low in order to successfully dispose of the stockpile,” Dim Sums notes.
African swine fever has discouraged swine producers from restocking herds, potentially shrinking feed use of corn. MARA announced two new cases in two new provinces: Shandong and Guangxi. China has also reported a swine fever case in Yunnan province, according to Reuters.
Analysts also note that more aggressive auctions of low-quality wheat and rice from reserves could also compete with corn in feed and ethanol use. “Moreover, a pledge to buy U.S. corn and possibly other feeds to settle the trade war could further add to supply, driving prices down further,” the service added.
China Grain and Oils News notes that farmers have been slow to sell their corn this year. Only 62.5 MMT of the 257 MMT crop had been purchased as of Feb. 10, 16.7 MMT less than a year ago. “That suggests farmers have plenty of corn left to sell in the next few months of the peak marketing season, adding more downward pressure on prices,” Dim Sums believes. “If Chinese authorities agree to buy U.S. corn, they will likely ship it directly to a warehouse and lock it up for a couple years until China's corn glut finally dissipates.”
— China to boost land for soybeans, other oilseeds in 2019. China's Ministry of Agriculture and Rural Affairs said the country aims to increase the area for soybeans and other oilseeds by around 330,000 hectares (815,448 acres) in 2019, and the country will boost subsidies to soybean farmers in northern areas to increase acreage in the region. Echoing statements made earlier this week, the ministry said they want to develop and promote new soybean varieties with higher oil and protein yields.
The country also wants to expand rapeseed production near the Yangtze River and peanut production in northern areas, the ministry said. Cotton area is expected to be around 3.33 million hectares and sugar planting at 1.53 million hectares, the agency said.
— Other items of note:
Pelosi says House will vote on resolution opposing Trump’s emergency declaration for border wall. House Speaker Nancy Pelosi (D-Calif.) urged members of Congress to support the effort to block construction at the border, formalizing a strategy House Democrats actually settled on several days ago. In a “Dear Colleagues” letter, Pelosi said President Trump’s declaration “undermines the separation of powers and Congress’s power of the purse, a power exclusively reserved by the text of the Constitution to the first branch of government, the Legislative branch, a branch co-equal to the Executive.” She announced that the House would move “swiftly” to pass the resolution in the coming days. Its fate in the Senate, where Republicans hold a 53-to-47 advantage, is less certain.
White House orders agencies to defend the skies from cyberattacks. In its National Strategy for Aviation Security, the Trump administration called on the government to be more proactive in spotting threats to U.S. airspace. Link to report.
Supreme Court ruling targets hefty state fines. The high court ruled unanimously that states may not impose excessive fines, potentially jeopardizing asset-forfeiture programs that help fund police operations. Justice Ruth Bader Ginsburg wrote in her opinion that tyrants have used such fines to punish or silence political enemies.
— Markets. The Dow on Wednesday rose 63.12 points, 0.24%, at 25,954.44. The Nasdaq gained 2.30 points, 0.03%, at 7,489.07. The S&P 500 added 4.94 points, 0.18%, at 2,784.70.
Minutes from the Federal Reserve’s January meeting signaled uncertainty about the strength of the economy and officials took a wait-and-see attitude to future interest-rate increases. They showed unanimous agreement to hold off on future interest-rate rises until there is a clearer picture on the state of the U.S. economy, though some members acknowledged the economic outlook was more uncertain since their previous meeting. They also indicated a readiness to stop reducing the central bank’s $4 trillion asset portfolio this year.
Whoops... One bad bet cost Deutsche Bank four times its entire 2018 profit. Publicly unreported, until now, Deutsche Bank racked up a loss of $1.6 billion over nearly a decade on a complex municipal-bond investment that it bought in the runup to the 2008 financial crisis and failed to confront head-on, even as markets were upended and regulations tightened. Link to Wall Street Journal article for details.