China Seeking “Flexibility” On Phase 1 Trade Pledges As Its Economy Grinds To A Halt

China Seeking “Flexibility” On Phase 1 Trade Pledges As Its Economy Grinds To A Halt

Last night, when we reported the plunge in the yuan below 7.00 vs the dollar – traditionally a level that has been seen as triggering the US Treasury into screaming fx manipulation – we noted that it is only a matter of time before the US and China sat down to discuss just how viable the terms of the Phase 1 remain, especially with China’s economy now expected to slow below a 5% GDP if only in the short term, as the country reels from the fallout of the Coronavirus epidemic which has led to tens of millions of Chinese citizens living under mandatory or self-imposed quarantine.

We didn’t have long to wait, because moments ago, Bloomberg reported that Chinese officials “are hoping the U.S. will agree to some flexibility on pledges in their phase-one trade deal” as Beijing tries to contain the fallout from the health crisis that has infected over 17,500 and killed over 360.

The Phase 1 trade deal which was signed on Jan. 15 – just one day before China finally started reporting virus data – and is supposed to take effect in mid-February, has a clause that states the U.S. and China will consult “in the event that a natural disaster or other unforeseeable event” delays either from complying with the agreement. It’s unclear whether China has formally requested such a consultation yet, but according to Bloomberg sources the plan “is to ask for it at some point.”

As the report goes on to note, Chinese officials are evaluating whether the target for economic growth this year should be softened as part of a broader review of how the government’s plans will be affected by the deadly virus outbreak. However, so far it does not appear that the US is rushing to concede to Chinese demands, especially since Larry Kudlow last week said that the U.S. hasn’t seen any major effects on its economy from the epidemic.

“This is principally a public health problem and the pandemic of course is in China, not the U.S.,” Kudlow said Thursday in an interview on Fox Business Network. “Insofar as the economy, we see no material impact.”

Curiously, the Bloomberg report comes about an hour after the WSJ reported that the Trump administration has been granting fewer exemptions to tariffs on Chinese imports, with the approval rate recently plunging to 3% in the third round of levies from 35% in the first two.  More from the source below:

Requests for exemptions have been made by more than 4,500 companies, which typically say they have no viable or cost-effective alternatives to Chinese products. Many companies seek more than one exemption. For just the fourth round alone, more than 8,700 requests for exemptions were made by Friday, the filing deadline.

HealthWay Family of Brands filed for 11 exemptions on electronic and other parts it imports from China to build air cleaners in Pulaski, N.Y. When the U.S. Trade Representative denied all its requests, the company was forced to lay off eight of its 48 workers and sideline plans to expand, said Vinny Lobdell Jr., the company’s global president.

“We were set to build a $2 million expansion,” said Mr. Lobdell. “We had looked at bringing 30 to 40 more jobs to the area as the Intellipure product line was growing.”

With the Trump admin playing hardball with US demands for easier tariffs, it is hard to see just why he would concede, even if China were to wrap its request as a “force majeure.”

Meanwhile, the market’s verdict on the US-China trade deal remains one of pervasive skepticism, with soybean prices – one of the main commodities Beijing agreed to purchase – reflecting rising concern about weaker demand from China. Soybeans traded in Chicago were little changed after nine straight days of declines, the longest losing streak since July 2014.

And in more bad news for Beijing, if it is indeed hoping for mercy from Trump, when asked if the virus will give the U.S. more leverage in the second phase of trade discussions with the Asian nation, Kudlow said the outbreak is “completely separate from trade, jobs and all the rest.”

“This is an issue of helping them if we can, offering our assistance, engaging with them, this is a humanitarian effort on our part — nothing to do with economic rivalries,” he said.

Ironically, so far China has refused every US proposal to help with the coronavirus epidemic: one wonders why – is it to prevent US observers from seeing just how China “handles” the flood of deaths resulting from the disease, which according to numerous sources, is far, far greater than the official number, and that Chinese officials are merely rushing to burn the bodies to avoid having to specify the true cause of death, in order to keep mortality rate calculations low and prevent an even greater panic within Chinese society.

Tyler Durden

Mon, 02/03/2020 – 10:31

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Author: Tyler Durden

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