A bueno deal for Xi and the markets

Hi everyone, I have moved up the Monday newsletter to Sunday evening to get out some quick thoughts on the Trump-Xi meeting. I am going to be on CNBC in the US tomorrow at 6AM to discuss the meeting and so there will likely not be another newsletter until Tuesday. Wish me luck, I have not done TV in a very long time…

The US and China agreed to step back from the brink of the trade conflict, at least for 90 days. President Trump told Xi Jinping that he will not add any new tariffs or increase the rate on existing ones while the US and China spend the next 90 days trying to work out a more lasting deal.

Conveniently that timeline gets both sides through key holidays—Christmas in America and the Lunar New Year in China. It also means the deadline hits right as the 2020 US Presidential election starts gearing up.

Markets so far seem pleased at the outcome, though there is little to indicate any of the structural, contentious issues in trade (such as IPR protection, forced technology transfers, State-owned enterprises) or just about every other dimension have a better chance of being resolved now than they did before the meeting. I did not see anything announced from the US side about human rights, Xinjiang, or the three American citizen family members of Liu Changming who are not allowed to leave the PRC.

At first glance the outcome looks like a win for Xi Jinping and China. The Chinese are always playing for time and any pause that involves more talking is a victory for Beijing, as it only adds to the chances they have for a shift to a more favorable US domestic political environment and, as we have learned with the waning “maximum pressure” campaign on North Korea, once you step back from the brink it is difficult to marshal the support to return to it if the talks do not bear fruit.

Jonathan Swan of Axios adds some color in his newsletter this evening:

China hawks may have more reason to be concerned given that stock futures are way up on the G20 news. In the wake of Buenos Aires, I spoke to two sources familiar with Trump's thinking on China, and both said they worry he's too concerned about keeping the stock market buoyant to risk tanking it by hitting China with new tariffs. A stock market boost on Monday could reinforce Trump’s instincts. (Which would suit free traders Larry Kudlow and Steven Mnuchin just fine.)

  • These hawks worry the Chinese can drag the "dialogue" with the Trump administration beyond the 90 days, delaying action from a president hobbled by looming Democratic subpoenas, a special counsel investigation and a wobbly stock market.

  • "Everything has got to be seen through the prism of the investigation and needing short-term micro tactical wins," said one of these concerned hawks. "And that's why the stock market going up is a win."

  • "The whole effort with China has been brought to a grinding halt," the source argued, comparing the delay to a short-term continuing resolution to kick the government funding fight down the road.

Which begs the question: has President Trump, who has pushed the Chinese on trade harder than any recent US President, failed to maximize the leverage his administration policies created?

There are not many details of the Saturday deal. According to the White House statement:

China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately.

Any resumption of bulk buying of US agricultural goods would be welcomed by US farmers who looking at rotting crops and massive losses.

The official Chinese statements and reports do not specify purchases of agricultural goods. Bloomberg has a good chart comparing what the two sides are saying publicly about the deal—U.S., China Trade Truce: Side-by-Side Comparison of Statements, with the chart tweeted by one of the journalists:

Peter Martin@PeterMartin_PCMConfused about what exactly Xi and Trump promised each other yesterday? Here's a side-by-side comparison of the readouts from both sides. The U.S. on the left, China on the right https://t.co/5N7aISEdew @LucilleLiu @JDMayger @Jeffrey_Black

The Sunday CCTV Evening News has a report (习近平同美国总统举行会晤) on the meeting. It is the second report, after one on Xi’s attendance at the G-20. The CCTV report does not include specific mentions of purchases of US goods or the 90 day timeline, but it does note Trump’s comment that America welcomes PRC students and Xi’s commitment to do more to crackdown on Fentanyl production and export. Does that mean that Alibaba will come under pressure to remove all listings for fentanyl and its related compounds?

People’s Daily puts their happy handshake top right of page 1 of Monday’s paper:

Xinhua says that Xi, Trump hold 'very successful' meeting on ties, trade.

If you have a company with significant supply chain exposure to China you should continue to be making plans to reduce reliance on China. Maybe we really have walked back from the brink, but I doubt it and am still very skeptical that the US and China can solve the underlying structural issues in the next several years, let alone 90 days.

What’s next:

  • Liu He may bring a negotiating team to DC in the next ten days or so. If he does not show up soon that is probably a bad sign:

  • In December China will hold the annual Central Economic Work Conference, possibly a Fourth Plenum, and likely a big speech from Xi for the 40th anniversary of the 3rd Plenum held from December 18 -22 that year, the meeting that marked the start of the Reform and Opening Era.


There is no Essential Eight today, but here are some recommended readings:

1. Trump’s “leading authority on China” Michael Pillsbury is the subject of Politico and New York Times profiles this weekend. It seems quite the coincidence that they would both run similar stories right before the big Trump-Xi meeting.

Politico - The China hawk who captured Trump's 'very, very large brain':

A day before President Donald Trump departed for the G-20 summit in Buenos Aires, several top officials gathered in the Oval Office to strategize about Trump’s highly anticipated meeting there with China’s president…

Before the discussion ended, Pence stepped out to fetch an outsider for a final briefing about Trump’s Saturday dinner with Chinese president Xi Xinping, which could determine whether the U.S. and China plunge deeper into a potentially disastrous trade war.

That outsider was Michael Pillsbury, a starchy academic at Washington’s conservative Hudson Institute enjoying a remarkable, and unlikely, influence. He has caught the ear of Trump, who during a November press conference proclaimed him “probably the leading authority on China.”..

He reportedly lost (then regained) his security clearance in the 1980s amid suspicion that he leaked classified information. He said he is currently in the process of trying to renew his clearance…

One former senior White House official supportive of Pillsbury’s views said that several key administration figures like Mattis were initially reluctant to view China as a primary strategic threat.

Now, thanks to Pillsbury, the former official said: “Everybody’s woke.”

New York Times - A China Hawk Gains Prominence as Trump Confronts Xi on Trade:

Michael Pillsbury had just finished a rib-eye salad at the Cosmos Club on Tuesday when he received a text message from the White House: “The president is trying to reach you. Call back.”

A day later, Mr. Pillsbury huddled in the Oval Office with President Trump and senior members of the White House economic team ahead of a pivotal weekend meeting in Argentina between Mr. Trump and President Xi Jinping of China.

For more than an hour, Mr. Trump, Mr. Pillsbury and advisers including Steven Mnuchin, Wilbur Ross, Larry Kudlow, Jared Kushner and Peter Navarro, who joined remotely from California, strategized about negotiations with China…

He has worked closely with Matthew Pottinger, the senior director of Asian affairs on the National Security Council, and the White House considered offering him a formal role, according to a former official, but there were concerns about his ability to get a security clearance. Mr. Pillsbury said that it remained a possibility and that he would like to be the ambassador to China someday.


2. The China Media Project looks at the renewal of the Mao-era “Fengqiao Experience” social management approach in the New Era—A Rock Star’s “Fengqiao Experience” | China Media Project:

The community members providing the tip off were apparently from a “community group,” or qunzhong zuzhi (群众组织) known as the “Old Neighbours of Shijingshan” (石景山老街坊).

In Beijing, this is one of a number of fairly well-known and well-documented community groups. Others include the likes of the “Chaoyang Masses” (朝阳群众), the “Haiding Internet Users” (海淀网友), the “Xicheng Aunties” (西城大妈) and the “Fengtai Advising Squad” (丰台劝导队). 

These groups point to an emerging, and already quite developed, new model of community management in China that is being linked quite explicitly to a Mao-era experiment in social management known as the “Fengqiao experience,” or fengqiao jingyan (枫桥经验) — an experiment President Xi Jinping has voiced enthusiastic support for since he was the top leader of Zhejiang province 15 years ago, and which now seems to be a core idea for social and public security management in the Xi Era.


3. The first issue of China Leadership Monitor under the leadership of Minxin Pei is now live.


4. Duowei reports there is another round of rumors that retired senior PLA offices Wu Shengli, Cai Yingting and Wang Haongyao have been detained. This would be huge if true, but again it is so far just an interesting rumor.—传解放军三大退役上将同日被捕_中国-多维新闻网:

中共反腐目前仍在持续进行,解放军系统落马风声不断。近日有传言称,有三名退役上将同日被捕,但未得到官方证实。

《世界日报》11月30日报道,最新传说11月29日,解放军前海军司令吴胜利、原南京军区司令蔡英挺、中共军委装备发展部政委王洪尧。

5. ‘Crazy Rich Asians’ Flops at the Chinese Box Office – Variety:

Hollywood summer hit “Crazy Rich Asians” will be lucky to score more than $1 million in its opening weekend in China.

Afternoon admissions Friday had ranked the romantic comedy in fourth place. But by Friday evening, it became apparent that mainstream Chinese audiences’ interest was barely flickering for the movie, and on Saturday, exhibitors began ditching it in favor of other titles.

Estimates from local sources suggest only an eighth-place finish for “Crazy Rich Asians” over the weekend, with a performance far behind Chinese-made “A Cool Fish” and still-potent “Venom.” “Crazy Rich Asians“ earned about $410,000 on Friday and $400,000 on Saturday.

Barring really big news the next issue of the newsletter will be on Tuesday.

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