26. Juni 2019

Carrot and stick with China and US
In the run-up with regards to the on-going Sino-US trade
talks, we have seen the carrot-and-stick approach from both
sides as they leverage their respective negotiating power.
The key events are:
 In additional to Huawei, the US administration has further
blacklisted another five major Chinese superconductor/super-computer firms to prevent them from
doing business with US. This is an escalation of tech war
that has added another dimension to the trade war saga.
 US vice president Mike Pence has finally decided to
withdraw his critical speech on China for the 30th
anniversary of June 4 event. President Trump argued
that the timing of the speech would not help on-going
trade talks with China.
 Chinese president Xi Jinping’s unexpected visit to North
Korea last week received unprecedentedly warm official
reception by Kim Jong-un. This can be interpreted as a
show of power by China of its close relationship with
North Korea. Beijing may use its influence on possible
denuclearisation of North Korea as one of the bargaining
chips with the US.
 Also, surprisingly, it was reported that President Trump
had sent a letter to Kim Jong-un. North Korea’s official
statement described that it has an ‘excellent content’ and
the regime felt the letter was ‘satisfactory’.
 Ever since Trump’s additional tariff imposition on 10 May,
China has doubled its efforts to consolidate non-US
strategic alliances. The latest round of economic
cooperation with Russia is an intended move to counter
any further fallout from its strategic confrontation with the
Likely outcomes
The above developments suggest that an outright break-up of
talks at the G20 meeting between US and China looks
unlikely. But there is no evident breakthrough on lingering
issues that caused an abrupt ending to the negotiations last
month. Issues such as tariff removal and any change in
Chinese laws to accommodate US’ demand for reform on
forced technology transfers and market access remain.
We see the most likely outcome from the G20 meeting is an
extended truce while negotiations resume but with all existing
tariffs maintained.
We attach the following probabilities for three different
scenario outcomes:
1) No trade deal, resumed negotiation, no tariff removed
(50% probability)
2) Trade deal, new tariff removed (20%)
3) Full break-up, tension escalates and spread into nontrade sanctions (30%)
If trade talk resumes, as anticipated in the first scenario, it will
cause little excitement on the upside potential because of
existing tariff constraint as well as still worrying US-China
relationship. Investors’ focus on policy stimulus from both
China and US will be the key market drivers.
The US Federal Reserve has already turned dovish in
communication and it is a matter of the timing for the next rate
We expect Beijing will have the capacity to reflate the
economy with both monetary and fiscal stimulus but only to
the extent that the global economy will not slip into a
recession. In our forecast, this is merely a tail risk at this

Anthony Chan
Chief Asia Investment Strategist