MNI: China Advisors Hopeful Of US Trade Deal By Mid-August

The framework reached during China-U.S. talks in London could pave the way for a trade deal by mid-August, potentially including Chinese purchases of U.S. Treasury bonds, and for a meeting between the two countries' presidents later this year, Chinese policy advisors and former officials told MNI.

China is in the meantime likely to accelerate approvals of rare earth exports for civilian use in exchange for relaxation of U.S. controls on mature semiconductor exports, said Wang Yiwei, director of the Institute of International Affairs at Renmin University.

Chinese officials described the meeting in London as "professional, rational, in-depth and candid", language which Wang said may point to a targeted approach to easing export controls. China could open a "green channel" for speedy approval of civilian rare earth exports to the U.S., as also promised to the European Union, but would ensure traceability to avoid any usage for military purposes or by U.S. companies sanctioned by Beijing, he added. 

Zhou Xiaoming, former deputy permanent representative of China's Mission to the UN Office in Geneva, agreed that China will move quickly to ease controls on rare earths in exchange for a loosening of restrictions on U.S. chips.

While Wang said the London talks were prompted by the U.S. need for rare earths, he added that Washington is also likely to soon ask China to increase its holdings of U.S. Treasury bonds, something which Beijing may be willing to consider.

"China can increase its holdings in the near term, with the scale depending on the yields, though it seeks to diversify its foreign exchange reserves in the long run," Wang said.

Zhao Yongsheng, a research fellow of the Institute of Regional and International Studies at the University of International Business and Economics, agreed that increasing U.S. Treasury holdings would be negotiable, given that it would be an investment for Beijing as well as a means of demonstrating good will. China has room to buy as much as USD500 billion, said Zhao, noting the difficulty of finding other investment targets of comparable size given the scale of the country’s forex reserves.

DEAL BY AUGUST

Advisors were optimistic regarding the chances of an agreement before the end of the 90-day tariff truce in mid-August.

Zhou said both the 24% tariffs which have been suspended for 90 days and the 20% linked to fentanyl are negotiable and likely to be removed under a trade deal, but that lifting the 10% reciprocal tariff would be the hardest for the U.S. to agree on. A best-case scenario for China would be for all tariffs to be removed other than for Washington's baseline of 10%, said Wang, though he added that Chinese companies would have the capacity to adapt to total levies of 30%. (See MNI: China Sees 10% Tariffs As Realistic, May Offer UST Deal)

A former official told MNI the two sides discussed the 24% tariff in London and may agree to extend the suspension period by another three months if talks need to continue. 

President Donald Trump is determined to address trade imbalances while Beijing's capacity to conduct large-scale purchases of American goods and to invest in the U.S. is diminishing, Zhao said, pointing to weak Chinese domestic demand and rising investment barriers.

XI-TRUMP MEET

Advisors and officials said a meeting between Trump and China's President Xi Jinping was possible later this year, assuming a deal is reached by mid-August.

"Both presidents are expected to attend the APEC Economic Leaders' Meeting in South Korea in November, and Trump could visit China before that," said Wang. He added that Trump may invite Xi to pay a state visit next year as the U.S. will serve as the rotating chair of the G20 and celebrate the 250th anniversary of its founding.

Zhou stressed that any top-level talks between the two leaders will be linked not just to a trade deal, but will depend on more complex issues, including geopolitical tensions. At present, the two sides still have many disagreements, he added. 

The former official said China would welcome Trump's visit, which could consolidate a future agreement to settle the trade war and also promote progress in other fields, such as the financial and military sectors. 

In a long-awaited phone call with Trump on June 5, Xi invited Trump to visit China while warning the U.S. that it should "handle the Taiwan issue prudently" and calling for cooperation in various fields, including diplomacy, economy and trade, military matters, and law enforcement.