China Weekly Letter: Phase one deal still in sight despite Hong Kong bill

• US-China trade talks do not seem to be affected by Trump's signature of a Hong Kong bill. China sets new goals to fight IP theft.
• First sign of possible tech flight from the US due to export controls and trade war.
• Profit growth drops sharply but it should be the bottom.
• Pro-democratic candidates secured 90% of the seats in the Hong Kong district elections.

Phase one deal still in sight before unofficial 15 December deadline

Markets got jittery this week as Trump put pen to paper and signed the Hong Kong bill, which works to support protesters in Hong Kong. As expected, China reacted strongly to the decisions and summoned the US ambassador in China, calling for the US to 'correct its mistake '. However, there was no sign that the dispute would affect the negotiations to reach a phase one deal. On Wednesday, US President Donald Trump said that 'We're in the final throes of a very important deal. It's going very well but at the same time we want to see it go well in Hong Kong'.

Over the weekend, China set new goals to fight IP theft in what seems to be another step closer to a deal with the US. The so-called 'guiding opinions' promise meaningful improvements with existing challenges in the process including 'difficulties in providing evidence, long processing times, high costs, and low payouts.'

Meanwhile more stories are surfacing about ailing US farmers, who have suffered a lot from the trade war. Bankruptcies are up 24% since September 2018 and Trump's approval among farmers is down this year. A study by US scholars suggested the Republicans lost five out of 40 seats in the House at the mid-term elections in 2018 as a direct result of the trade war. To add insult to injury a New York Fed study this week concluded that the US pays the majority of the bill from higher US tariffs on goods from China.

Comment. China has so far kept other cases of US confrontation separate from the trade talks and is likely to do the same with the Hong Kong bill. For example, the arrest of the Huawei CFO in Canada happened only a few days before Trump and Xi made a ceasefire (the first one) in December 2018.

We expect a phase one deal to be in place ahead of the unofficial deadline of 15 December, the date US tariffs on another USD160bn of goods from China will go into force unless Trump cancels them. However, this last tranche of tariffs will hurt the US economy more than previous tariffs, which Trump would most likely want to avoid. In addition, with falling approval among farmers, Trump is eager to get China to buy soybeans, pork and other farm products again. The farmers have generally supported Trump in 'taking on China' but have also been clear that it had to end with a deal that gave them their market back and preferably with even higher Chinese purchases than before the trade war. The latter would probably require a phase two deal next year, though.

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