China: What’s next after the trade talks – ING

According to Iris Pang, Greater China Economist at ING, China’s September trade data, released earlier this Monday, reflects increasing damage from the trade war. Pang provided a brief analysis if this could change after the recent trade talks and also offered an outlook for the Chinese yuan.

Key Quotes:

China said it had made “substantial progress” with the US after Friday’s meeting and again emphasised that “respect” is the key to future successful trade negotiations.
 
Still, there is a five-week period for the two sides to write down exactly what they agreed to in the meeting. This raises questions about how much “progress” has really been made. We think there are probably some important disagreements on the terms of a deal, which could include the yuan mechanism.
 
A statement is scheduled to be released in November. The timing is important because planned US tariffs are due to go into effect in December, hitting an additional $160 billion of Chinese-made consumer goods. If the two sides cannot release a draft agreement as planned in five weeks, it will not bode well for a trade truce.
 
China has always stated that the yuan mechanism is being reformed but we don’t think it will announce any significant changes to this in the draft statement. Still, the US is likely to continue to press China to appreciate the yuan, and this issue will make future negotiations tough.
 
The recent appreciation of the yuan is really just a result of the weak dollar rather than any deviation from the trend. We therefore do not think that the USD/CNY will fall below 7.0. Our forecast for 2019 year end is still 7.20.