China slowdown may force Beijing to accept Trump ultimatum on trade deal

'Heavy pressure to settle sooner rather than later'

The slowing Chinese economy may force Beijing to make a trade-war deal it doesn't want.

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“I suspect the increasingly pronounced slowdown in China’s economy, coupled with recent employment data pointing to continued strength in the U.S. economy, are putting heavy pressure on China to settle sooner rather than later,” Richard Koo, chief economist at the Tokyo-based Nomura Research Institute, wrote in a note to clients.

China, the world’s second-largest economy, grew at a 6 percent rate in the third quarter, its slowest since recordkeeping began in 1993. Growth is expected to slow to 5.8 percent in 2020 as the trade war and growing debt levels curb it, the International Monetary Fund said in its October 2019 World Economic Outlook.

Chinese equity markets have been under pressure as well. The Shanghai Composite has fallen 11.1 percent since the U.S. first announced tariffs affecting Chinese goods on March 1, 2018. By comparison, the S&P 500 has gained 14.9 percent.

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The People’s Bank of China has taken a variety of actions to combat the slump, including a reduction in two key interest rates this week. On Wednesday, the central bank lowered the loan prime rate, its official lending benchmark, for the first time in four years. A day earlier, it cut its seven-day repurchase rate.

China’s Ministry of Finance has called on the U.S. to roll back tariffs, which now cover more than $350 million of its exports, as part of a partial trade deal. President Trump has ruled that out. On Tuesday, the president threatened to raise duties on Chinese goods if the two sides are unable to finalize an agreement.

President Trump shakes hands with Chinese President Xi Jinping, right, during the G-20 summit in Osaka, Japan. The two countries are attempting to negotiate a broad trade agreement. (AP Photo/Susan Walsh, File) (AP)

“China’s going to have to make a deal that I like,” Trump said during a press spray at a cabinet meeting Tuesday. He added he would “raise tariffs even higher” if an agreement isn't reached.

The president has repeatedly said the strength of the U.S. economy, which grew at 1.9 percent in the third quarter, bolsters his negotiating position. Other data, including recent surveys on the services sector, which makes up about 70 percent of the U.S. economy, and retail sales showed the resilience of the economy.

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Even if a trade deal does come to fruition, it’s unlikely to offer support to China’s economy, according to Julian Evans-Pritchard, senior China economist at Capital Economics.

In a note to clients on Wednesday, Evans-Pritchard wrote the U.S. seems reluctant to “significantly dial back tariffs” and the most China can hope for is a “rollback of the September duties, which would only reverse one-sixth of the increase in the average U.S. tariff rate on Chinese goods since the start of last year.”