by Vincent Mivelaz
After infructuous talks with US trade delegation led by treasury secretary Steven Mnuchin with regard to trade disputes, the Chinese economy has started giving signs of a slowdown. First quarter 2018 current account deficit given at $ -28.2 billion, (prior: $ 62 billion), an historical low, is a strong signal that China can count on a sharp drop for the coming quarters if trade sanctions are to be enforced. Indeed, it is not common for the Middle Kingdom to encounter negative current account numbers, as it is only the second time it occurred, the last to date in Q1 2001, with a deficit estimated at $ -1 billion at that time.
Strongly impeded by a decline in services ($ -76.2 billion) and specifically from tourism and transportation, the Chinese economy turns out to be facing consequent structural changes. As goods trade remains in positive numbers ($ 53.4 billion; prior: $ 141.4 billion), though at five years low, it appears that the Chinese economy is more and more being consumption-driven rather than supported by its services. Accordingly, services trade downtrend since 2010 continues to be felt, falling from $ -5.20 billion in March 2010 to up to $ -77.08 billion in March 2018 and could decrease further in the coming periods.
The second round of negotiation expected to take place as early as next week won’t be an easy thing. Chinese Vice-Premier and Xi’s economic adviser Liu He delegation coming next week in Washington will continue negotiation in an attempt to prevent US tariffs threat on $ 150 billion worth Chinese goods to be implemented, as it is supposed to come into effect on May 22, 2018.
The conditions set by the Trump administration, in order to refrain from putting the embargo into action is costly: the US trade representative request a total of $ 200 billion cut by 2020 in Chinese trade surplus along with lower technology subsidies, a guarantee over intellectual property rights protection and no commercial retaliation measures. Ironically, this commitment doubled since Trump’s first request one month ago, keeping in mind that China’s trade surplus to the US amounted $ 278 billion in 2017, thus confirming that the target is notably overestimated. Recent China – Japan market cooperation agreement would in any case counterbalance the discord.
Therefore, trend tensions obliges, in case of an effective decline in China’s trade surplus, we would therefore tend toward further USD/CNY strength in the medium-term, unless the situation eases.
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