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Article / 07 April 2017 at 8:48 GMT

The Trump/Xi meeting and the silver lining

Managing Director / Asia-analytica Research
China
  • North Korea’s antics are upstaging economic issues at the summit 
  • The likely silver lining is on the commercial front 
  • Beijing may well hope to defuse tensions by offering “Tweet-able” concessions 
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 Both the US and China have their eyes firmly fixed on Pyongyang. Photo: Shutterstock

By Pauline Loong

Markets hate uncertainty and there will plenty of that at the summit meeting that started in Florida Thursday between US President Donald Trump and Chinese President Xi Jinping. 

The two countries are at odds over just about everything: trade, investment, Taiwan, the South China Sea, and now how to deal with North Korea’s increasingly aggressive nuclear programme. President Trump has ominously threatened to act unilaterally if China does not help rein in its ideological ally.

These are highly complex issues to which there are no simple solutions. Any announcement at the end of the summit is likely to hold multiple layers of interpretation that would add to market uncertainty rather than end it.

Markets have been on the sidelines since the missiles escalation by North Korea put the rogue nation’s nuclear ambitions on to centre stage (editor's note: notwithstanding the strike on Syria overnight). Battening down is the smart move in the event the Trump-Xi meeting hurtles towards that long-shot ending: a showdown.

Trump is a wild card. And China is in much the same position as markets: still learning to live with the new US president.

The question is not whether Trump will make good on his various threats over North Korea but whether China will say no by saying yes only to specific requests. China decided in February to ban coal imports from North Korea until the end of 2017. The decision was hailed everywhere as a sign that the Chinese are finally putting real pressure on its ideological ally. That China may already have been nearing a yearly cap on coal imports from North Korea set by a previous UN resolution received little media or investor scrutiny.

And there is trade. The US-China trade imbalance is well documented. China is the Americans’ biggest trading partner with the largest surplus in the trade of goods, accounting for $347 billion last year or almost half of the US total.

What would send markets tumbling is if the Trump administration formally announces substantial tariffs on Chinese exports to the US.

Such a move, however, seems unlikely at this point. Apart from anything else, retaliation concentrates even the most impulsive minds. It will not be lost on the US administration that China is among the top three export markets for 33 American states.

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 China is the top export for 33 US states. Photo: Shutterstock

China also argues it is not buying more from the US because it will not sell to China the goods that it wishes to buy, such as certain high-technology products.

But perhaps more importantly, Beijing understands the political realities facing the Trump administration and may well be prepared to offer the US leader “Tweet-able” concessions.
In times past, Chinese leaders visiting foreign countries bring with them tangible expressions of goodwill. In 2015, President Xi lf sealed a multi-billion dollar deal to finance nuclear power stations in Britain during his state visit there.

President Xi may or may not continue the practice. But he will certainly come prepared with goodies. Lending itself to positive headlines would be Chinese concessions on say steel, or new jobs-creating Chinese investments in the US, or perhaps even a timetable for allowing American companies to list in China’s domestic A-shares market.

A triumphalist tweet about bringing jobs back to the US and cracking open the Chinese stock market for American companies would go a long way towards defusing pressures to levy heavy tariffs on Chinese exports to the US. And that would definitely cheer markets.

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Better access to the Shanghai Composite Index and other Chinese stocks
would be an easy win for the US that China could give up. Photo: Shutterstock

— Edited by Martin O'Rourke

Pauline Loong is managing director of Asia-analytica Research

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