President Donald Trump and China’s Xi Jinping will sit down for a highly anticipated dinner on Saturday with investors and allies eager for a truce in the trade war between the world’s two largest economies.
Trump spent Friday in Argentina meeting with Group of 20 counterparts, projecting optimism that his “big meeting” with Xi will be fruitful, saying early in the day that he sees “some good signs” as his staff continue to negotiate with Chinese officials.
Any easing of tensions on trade could ease gains in the US dollar and boost riskier assets including emerging-market currencies and stocks, though investors and analysts agree that the US and China are trying to fix a long-term problem that cannot be solved in one dinner.
“What’s most realistic to expect is that China and the US come to an agreement on the basis of the dialogue and on the basis of the negotiations, because that has broken down. There hasn’t been a negotiation, not even a starting position,” Henry Fernandez, chief executive officer of MSCI Inc, said in an interview in Buenos Aires.
If talks fail to bring about a way for the two sides to negotiate, “markets will react negatively,” he said. “Tension between the US and China is creating a dent on a meaningful part of that global trading system.”
Who will blink first?
Since March, Trump and Xi have engaged in a tit-for-tat trade war and saber-rattling as the rest of the world waits to see who blinks first. The White House has sent mixed messages about US expectations for Saturday’s meeting, with economic adviser Larry Kudlow expressing cautious optimism earlier in the week, saying that while Trump was eager to work toward a deal with China, he couldn’t rule out that talks could be derailed if Xi’s offer wasn’t substantive enough.
Among the key US demands articulated by Kudlow and other officials are a halt in what it calls widespread intellectual property theft and forced transfer of technology by China. Trump has threatened to impose more tariffs on Chinese imports if the talks don’t yield sufficient progress.
Yet a Chinese official struck a cautiously optimistic tone a day before the dinner, saying that that the two sides were finding more common ground in their discussions.
“The points of consensus are continuously increasing, there are also disagreements,” Wang Xiaolong, a senior official at China’s foreign ministry, told reporters in Buenos Aires on Friday. “Let’s see the final result.”
Investors and the key US trading partners agree that one of the main problems of the economic relationship lies in China’s closed economy.
“China needs to accept the reality that they can no longer play as an emerging market that needs protection,” Fernandez said. “If they want to be part of the global trading system they need to open up to all countries.”
Ahead of the dinner, Xi spoke in support of the global rules-based order at a G-20 session. Evoking the history of the summit, he said “we should stay committed to openness and cooperation and uphold the multilateral trading system.”
Engagement by Chinese officials with the US side has been complicated by conflict within Trump’s economic team over how to achieve the president’s ultimate goal of a fair trade agreement with China.
Treasury Secretary Steven Mnuchin, who favors a measured approach, skipped the G-7 and G-20 finance ministers’ meetings held a day before the leaders’ summit began on Friday. He chose instead to fly with Trump and continue preparations with the president on Air Force One.
Mnuchin’s influence - cheered by investors - may be tempered by the presence of Peter Navarro, a noted China hawk who advises Trump on trade. Navarro wasn’t initially expected to attend the G-20 but was seen exiting Air Force One after landing in Buenos Aires late Thursday. Mnuchin and the US’s top trade negotiator, Robert Lighthizer, were seen to be in good spirits as they shuttled between meetings with counterparts on Friday, while Navarro remained out of sight.
Ultimately, the decision will be Trump’s.
'Facts and instrinct'
The president “will know through facts and instinct how to handle this,” Kudlow told reporters earlier in the week.
As positive a tone the US is striking before the meeting, Trump has not forgotten what’s at stake. Early on Friday he reminded the world about one of his key economic complaints: currency manipulation, an accusation he frequently aims at China.
Trump brought up the currency issue as he signed what he called a “model” trade agreement with the presidents of Mexico and Canada. He said the new North American deal “dramatically raised standards for combating unfair trade practices confronting massive subsidies for state owned enterprises and currency manipulation that hurt workers in all three of our countries.”
“The currency manipulation from some countries is so intense, so bad,” Trump said at the signing, without naming China specifically. He has repeatedly called China a currency manipulator on Twitter.
Including a commitment to currency transparency is seen as a precedent set by the Trump administration for negotiating with countries that have a history of manipulating their exchange rates. Mnuchin has consistently urged his counterparts to reinforce global “exchange rate stability.”
“The market really wants to see a deal with China,” said Peter Mallouk, the co-chief investment officer of Creative Planning, a wealth-management firm with about $36 billion in assets. “If we can get any kind of trade indication in the coming weeks that there was a path to getting a deal done, I think people would be surprised how positively the market would react to that kind of news.”
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