US-China trade talks take center stage
The United States and China resumed trade talks in London on Monday, June 9. Senior American and Chinese officials met to resolve a trade war that has escalated into tariffs on Chinese and American goods. The easing of trade tensions, including a 90-day trade truce, allowed the two sides to meet. However, since the truce, both sides have traded accusations of breaching the truce, suggesting the negotiations could heat up.
A key focus has been rare earth mineral exports to the United States, and Trump’s restrictions on semiconductors and other AI-related technology. Despite accusations of breaching the truce, President Trump and Chinese President Xi Jinping held a phone call last week, facilitating this week’s trade talks. Notably, China has extended a helping hand ahead of Monday’s talks, granting rare earth mineral export permits to US auto suppliers. This move has boosted optimism about a trade agreement.
Key attendees at Monday’s talks included US Treasury Secretary Scott Bessent, US Trade Representative Jamison Greer, US Secretary of Commerce Howard Lutnick, Chinese Vice Premier He Lifeng, Chinese Minister of Commerce Wang Wentao, and China International Trade Representative and Vice Minister of Commerce Li Zhenggang. The talks lasted six hours and will resume on Tuesday, June 10. Hassett, director of the US National Economic Council, was quoted by CNWire as saying:
“We definitely expect progress in the US-China talks. The US-China meeting today will be short, but the results will be negative. We expect China to release the metals, and the US needs the US to release its export controls if the Chinese talks go well.”
Economists skeptical about reaching an agreement
Despite optimism that the United States and China could reach a positive agreement, some economists believe a meaningful trade deal will be elusive. Alicia Garcia-Herrero, chief economist at Natixis Asia-Pacific, commented, “While a temporary truce on export controls is possible, a meaningful agreement remains unlikely.”
Concerns are growing about economic distancing.
While trade talks will take center stage on June 10, economists and market analysts have expressed concerns about the economic divergence between the United States and China. Herrero commented, “We must pay attention to persistent deflationary pressures in China and creeping inflation in the United States, which underscore the persistence of economic divergence.”
Chinese inflation and trade data received significant attention on June 9 ahead of the resumption of trade talks. Consumer prices fell 0.1% year-on-year in May, matching April’s decline, while producer prices fell 3.3% year-on-year after declining 2.7% in April.
East Asia Econ commented on the inflation data, saying, “China – Producer Price Index (PPI) is pushing inflation further down. The CPI was surprisingly strong in May, with the core index continuing to reverse the 2024 contraction. However, overall, core indicators remain very weak. Core indicators have started to deteriorate again, and the PPI contraction accelerated in May. The GDP deflator will be negative again in Q2.”
Trade data highlighted the impact of tariffs on demand for US goods, underscoring the importance of this week’s trade talks. Exports rose 4.8% year-on-year in May, down from 8.1% in April, while imports fell 3.4%, accelerating from a 0.2% decline in April. The terms of trade with the United States attracted particular attention.
Commenting on the May trade data, East Asia Econ magazine stated: “China continues to see a sharp decline in exports to the US. The general trade trends – strong exports, weak imports, and a large trade surplus – remain. But Trump’s tariffs are causing significant shifts in the structure of exports. Direct shipments to the US are down 40% this year, and excluding the pandemic, they haven’t been this low since 2013.”
Markets look to London as uncertainty over trade deal persists
On Tuesday, June 10, markets in Hong Kong and mainland China showed a muted reaction to overnight trade developments. The CSI 300 and Shanghai Composite indices in mainland China rose 0.18% and 0.12%, respectively, while the Hang Seng Index gained 0.18% in early trading.
However, despite ongoing US restrictions targeting China’s progress in artificial intelligence and technology, the Magnificent 7 Index continues to underperform the Chinese technology sector. The Roundhill China Dragons ETF is up 21.91% year-to-date, while the Roundhill Magnificent Seven ETF is down 2.11%. This continued divergence highlights market expectations of China’s ability to advance technology and artificial intelligence despite US restrictions.
As US-China trade talks enter their second day, Hong Kong and mainland Chinese markets remain vulnerable to key trade headlines. A truce on trade restrictions on technology exports and rare earth minerals, along with the removal of tariffs, could lead to broad-based gains. However, a breakdown in the talks and the retention of tariffs and restrictions could send investors fleeing to safety, weighing on regional stocks.
