To be clear, not everybody was excited on Saturday about Donald Trump’s conciliatory remarks regarding Huawei, China’s besieged national champion.
In comments to reporters following the G20, Trump suggested on a number of occasions that Huawei will be able to purchase products from US companies, something the tech giant was effectively banned from doing last month when the Commerce department added it to the entity list.
It wasn’t clear whether Trump would, in fact, remove Huawei from the list, but what he did say was definitive enough to prompt an excited tweet from the company’s official Twitter account.
Senators Marco Rubio and Chuck Schumer were incredulous. Both warned that backing off Huawei would seriously undermine the administration’s ability to hold China accountable. Rubio went so far as to call the apparent relent “a catastrophe”.
Read more: Trump’s Huawei Relent Draws Jeers From Schumer, Rubio, Kyle Bass
If you were looking for an upside surprise to market expectations, a prospective lifting of the ban on Huawei would fit the bill, something Goldman emphasizes in their initial reaction to the new truce between Trump and Xi, which the bank says was largely in line with expectations.
“US easing of export sanctions related to Huawei is a potential unexpected market-friendly outcome”, the bank wrote Saturday, before walking through Trump’s confusing back-and-forth with reporters:
President Trump indicated that “we will have to save that to the very end.” However, he also indicated that “US companies can sell their equipment to Huawei. We are talking about equipment where there is no great national emergency problem with it.” In response to direct question “are you taking Huawei off the Commerce Department Entity List?” President Trump “No, not at all, we are going to be talking about Huawei. But we are going to be supplying equipment from our companies….but we are not discussing Huawei with President Xi yet. I want to see, before we start getting into that, I want to see where we end up. We have a national security problem, which to me is paramount, very important.” But in response to a follow-up asking an identical question regarding the entity list, he said “we are talking about that, we have a meeting tomorrow or Tuesday.” In response to a third nearly identical clarifying question, President Trump said “I don’t want to talk about it now, we are looking at it very carefully, Huawei is very much in play…I will say that we are not making it a big subject and we are going to save that for later.”
As noted in our press conference highlight reel, Trump’s explanation of this situation was ambiguous at best, and wholly indecipherable at worst. But, the fact that he didn’t rule out lifting the ban and, in fact, said US companies could ship to Huawei, appears to mean that the next move will be a deescalation, not a ratcheting up of pressure on the company.
For Goldman, this could simply mean that the US will be granting more temporary reprieves. “While the situation is unclear, one possible explanation is that the White House is considering a broadening of the current temporary general license for certain US exports to Huawei while keeping it on the Entity List”, the bank says. If that’s the case, Goldman notes that while it would “remove some of the restrictions on exports to Huawei” it would likely only cover a “short period and limited to a subset of products.”
Later, Trump took to Twitter and offered a bit more clarity – sort of. “At the request of our High Tech companies, and President Xi, I agreed to allow Chinese company Huawei to buy product from them which will not impact our National Security”, he said.
While the reaction from some US lawmakers (and likely from hardliners within the administration) has been one of consternation, the Chinese side seems to feel pretty good about things. “The reaction from China has been generally positive. Chinese media (e.g. CCTV) have reported favorably on the talks and there appear to be somewhat fewer discrepancies between the US and Chinese interpretations of the outcome of the meeting than there were following the G20 meeting in December”, Goldman goes on to say.
As far as whether this is likely to materially change the calculus for China when it comes to the necessity of stimulus measures, the bank thinks the answer is no. “Although the outcome might help confidence on the margin, we expect Chinese policy settings to be kept fairly loose given the lack of any immediate tariff relief and the upcoming 70th anniversary of the PRC”, the bank writes. On the yuan, Goldman says the onshore spot should stay under the psychologically important 7 handle as long as talks don’t get derailed again.
Trump did agree to halt the imposition of additional tariffs, but Goldman reminds you that with the comment period expiring, it will be easy to pull the trigger. “The comment period on the notice to impose additional tariffs ends July 2 and the White House will be able, from a procedural perspective, to issue a final notice soon after [so] if talks break down again or fail to produce an agreement, tariffs could be put in place quickly”, the bank warns. Goldman still thinks it’s more likely than not that Trump will hit the remainder of Chinese goods with 10% duties at some point, although it’s a close call.
Finally, while it’s not surprising that no real progress was made in the short meeting, it shouldn’t be lost on anyone that any lingering disagreements on key structural issues remain unresolved. As Goldman puts it, “it is unclear whether the meeting involved any discussion of the underlying substantive issues [although] that does not appear to have been the focus of these discussions.”
I’m interested in how the Chinese government may assess the situation now.
They know:
– Election in 17 months, a fairly short time.
– Outcome uncertain, with history suggesting incumbent President usually wins when economy is in its current state, but midterms and polls suggesting this incumbent may be weaker than history implies.
– Incumbent sensitive to US stock indicies.
– A “deal” with the US is not a deal until ratified by Congress, normally a lengthy process, and now one chamber is controlled by the opposition.
– A ratified deal is still not a permanent deal, with this incumbent.
– An unratified deal is vulnerable to re-negotiation if the incumbent is replaced (US regime change)
– Status quo (existing tariffs remain, new tariffs on hold, uncertainty high) is economically damaging to both countries, with negative effects in the US starting to become evident in some data.
Would the Chinese government conclude that their leverage to make an unratified deal with the incumbent will rise as the election approaches, while the value of such an unratified deal will decline as a potential US regime change approaches, such that if they cannot reach a favorable unratified deal by a certain date then they are better off “running out the clock”?
After all, imagine negotiations drag on to June 2020; would Trump really slap 25% tariffs on am remaining China trade + death sentence on Huawei and watch the S&P plunge 20% into Election Day?
Here the markets and their know it all’s prefer trump juice to acuity.
This is all the process of manufacturing potential Bullish events for the equity market’s consumption…First we create Huawei crisis to look tough ..that is Bearish..We surround it with a trash load of Fed speak…..that negates the effect it and it is after a time placed on the shelf as a bullish event when ..voila ..it is rescinded…After a time we look like a paper tigers but not if it solves the trade deal . The fact that the trade deal does not solve any issues that existed before the trade crisis does not seem to matter because now Trump (or whoever ) is a hero for saving the economy… Known in other circles as Business as Usual….!!!! What is it that is so difficult to see in this especially as it is so oft repeated?
That is how it looks from the US side. But you need two to tango. How does it look from the Chinese side? Are they content to be used as a reactive prop in the Trump Show?
After all, the Chinese can trigger a fall in US stocks, by conduct or statements about the negotiations. Not without harm to themselves, but Xi doesn’t have an election date.