How does the market react to China-US consensus on the text of the phase one agreement?

Through the joint efforts of the economic and trade teams of China and the US, the two countries, based on the principle of equality and mutual respect, agreed on the text of a phase one economic and trade agreement on Dec. 13, 2019.

In response to this news, international capital markets have given positive readings last week.

I once asked a friend who conducts research on capital markets to draw an “ECG” for the global stock market. As is shown in the “ECG”, “heartbeat” of the global market follows every round of high-level consultations between China and the US.

It also illustrates that each “hand-shaking” eliminated “uncertainty” of the time and brought positive expectations to the market. The best “weapon” to prevent “black swan” and “grey rhino” is not tariff nor confrontation, but cooperation.

Yuan Youwei, deputy director of Department of Consultancy of the China Center for International Economic Exchanges, said that the conclusion of the first-phase agreement is good news to not only China-US economic and trade relations, but also the world economic situation. Downward pressure on the world economy is currently increasing, and global investment is decreasing. The first phase agreement will help increase the stability of world economic development, boost investor confidence, and provide the world economy with new impetus. The US-China Business Council released a statement on Thursday, saying they were delighted with the progress and hoping that it would help lift confidence between the two sides. Craig Allen, president of the US-China Business Council, said that the first-phase agreement reached by the two sides is “encouraging”.

The US Chamber of Commerce also said that “both sides deserve credit for taking actions”, and that “the news creates clarity for businesses and provides a lift for American consumers”.

“This is the first bilateral trade deal in 20 years – it was hard fought, hard won and long overdue,” said Henry Paulson, former US Treasury Secretary and former chairman of Goldman Sachs. “It is an important one because of the immediate economic benefits it will drive.”

In fact, there is increasing awareness that, it is US consumers and companies that are ultimately “paying” for US tariffs on China.

Mathew Shay, president and CEO of the US National Retail Federation, said last week that burden and negative consequences of the uncertainty brought by tariffs fall disproportionally on midsize, smaller, independent retailers, as they are at a disadvantage in terms of size, resources, and infrastructure.

Shay also called on the two countries to resolve the divergence and trade disputes through negotiation, as a positive resolution would be “the best possible outcome” for the economy, the consumers and the workers in the US.

Another step towards solution

At the China Economy Annual Conference held on Dec. 14, 2019, Yu Jianhua, Vice Minister of Commerce and deputy representative of international negotiations, said that China and the US had agreed on the text of a phase one economic and trade agreement. He also said that the agreement and its successful implementation would boost market confidence, which would benefit China, the US, and the whole world.

Shortly after the release of the news that China and the US had reached consensus on the text of the first phase agreement, Liu Xiaoqian, a journalist of China Media Group Washington Bureau, received a text message from an American farmer.

Last month, Liu just interviewed Brian, an Illinois soybean farmer and owner of a modern pig farm. Brian expressed great concern about trade frictions. What worried him most, however, was that the long-term impact of the tariffs would deprive farmers like him of the opportunity for entering the Chinese market.

He texted Liu Xiaoqian to express his feelings as soon as he learned about the latest situation of the China-US economic and trade consultation.

Text content: Good News! Waiting to see the details but hopeful this agreement lives up to the hype and provides a much needed economic boost to rural America. I also hope it provides a framework to a positive relationship with US and China for years to come. Let’s see the details.

The text also expresses the feelings of many soybean farmers like Brian. On the same day, the forward price of Chicago soybeans rebounded, going up 0.93 percent to $9.21 per bushel at the end of the day.

Analysts said that China-US trade relations were the main factor dictating the trend of the forward price of American soybeans. The consensus on the text of the first phase agreement alleviated the “soybean anxiety” of soybean farmers.

Over the past years, about 60 percent of US soybean exports have entered China. However, since 2018, US soybean exports to China have plummeted to 18.9 percent of its total exports, as a result of the repeated US tariffs and China’s countermeasures. The US produces around 100 million tons of soybean per year, of which around 56 million tons are exported, of which 60 percent, around 32 million tons, are exported to China. American soybean farmers should be in a good mood during this Christmas holiday.

In fact, China and the US are highly complementary in the field of agriculture. The two countries have complementary needs and overlapping interests. According to Han Changfu, Minister of Agriculture and Rural Affairs, “China and the US are cooperative partners in agriculture, and there’s wide space for cooperation.” Chinese foreign trade companies are also concerned about the news of the agreement text.

Previously, I have visited several foreign trade production companies in China. All were more or less affected by the trade frictions. The major problems they confronted were the decreased US market share and shrunk profit margins. What’s worse, the uncertainty brought by trade frictions and the mutability of US tariff policies caused problems for their price negotiations with retailers. The important progress in China-US economic and trade consultations has brought hope to entrepreneurs.

Wei Wenkun, deputy general manager of Shandong Jiaozhou Tianyuan Aquatic Food Co Ltd, told me that since the agreement was reached, American clients have already contacted them, consulting about their products.

He expected to see more inquiries from American clients from Christmas to January next year. If prices are acceptable (for the clients), they’ll receive orders from the US in the coming year.

“The agreement on the text of the first phase agreement is certainly a great thing for companies. It also makes us know that improving core competence is the most important,” said Wang Xiong, head of a commodity trade company in Ningbo.

Maybe this is just the beginning

Consensus on the text of a phase one economic and trade agreement signifies a step towards solving the problem.

“There’s a Chinese saying that all things are difficult in the beginning. The first step is the most important. With that first step, there’re reasons for people to believe that we can negotiate a good deal with the US,” said Gao Lingyun, a researcher with the Institute of World Economics and Politics under the Chinese Academy of Social Sciences. China has always been pursuing higher levels of opening-up and higher quality of development.

At the China Economy Annual Conference held on Dec. 14, 2019, Han Wenxiu, deputy director of the Office of the Central Commission for Financial and Economic Affairs, said that China’s doors will open wider and wider to the outside world. China will open up more broadly and deeply, striving to promote reform, innovation, and development through opening-up. The most valuable lesson from the past 40 years of China-US relations is that cooperation is the only proper choice. China and the US should respect each other, and seek common ground while reserving differences.

Development is the absolute principle. This is the most valuable lesson Chinese people learned from the 40 years of reform and opening up. Whenever it is, it is most important to do one’s own things well. Therefore, this is just the beginning.