Global demand for oil is expected to drop. Photo: iStock/Getty Images

Hope, hype, and pragmatism. Already this week is shaping up to be an economic rollercoaster with key talks between China and the United States penciled in for Wednesday.

The meeting will take place as the clock continues to run down on the trade war truce, which was hammered out by US President Donald Trump and China’s head of state Xi Jinping at the Group of 20 summitin Buenos Aires last month.

With the March 1 deadline looming, Vice-Premier Liu He will travel to meet US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer in Washington on January 30-31.

A key discussion point will be the ballooning US trade deficit between the world’s two largest economies, which hit a record US$323.3 billionlast year, according to figures released by the General Administration of Customs earlier this month.

Other crucial areas involve intellectual property violations, forced technology transfers and Beijing’s state-subsidies model as far as Trump’s team is concerned.

Finding a solution will require compromise as well as diplomacy.

“The US-China relationship has now reached what respected China scholar David M. Lampton describes as a ‘tipping point,’” Ryan Hass, a senior fellow in foreign policy for the John L. Thornton China Center at the Brookings Institution, wrote.

“The basic assumptions and expectations that guided the development of US-China relations over the past 40 years no longer hold and, so far, no consensus has formed in either country about what should replace them,” he added.

Hard bargaining

Still, another snapshot of the state of China’s economy emerged on Monday just 48 hours before the hard-bargaining begins.

Earnings from the country’s industrial companies were rolled out by the National Bureau of Statistics with profits jumping 10.3% to 6.64 trillion yuan ($990 billion) last year compared to the previous 12 months.

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But the pace of growth was still down from 21% in 2017 compared to the previous year.

“The 2018 profits mostly came from the oil and natural gas extraction industry, along with ferrous metal and chemical sectors,” He Ping, a senior official at the NBS, said in a statement.

Since those sectors are dominated by major state-owned conglomerates, the numbers hardly reflect what is going on in the crucial private sector.

Profits dropped

Overall, profits dropped 1.9% in December to 680.8 billion yuan year-on-year due to weak factory-gate prices and soft demand.

The downbeat data illustrated that the economy is continuing to cool after the 1.8% decline in November, which was the first fall in profits in nearly three years.

To underline the depth of the slowdown, industrial activity at small- and mid-sized enterprises, or SMEs, tumbled again in the fourth quarter of 2018, despite a raft of government measures.

The SME Development Index came in at 93 for the last three months, which was below the 100-mark that separates growth from contraction, the National Development and Reform Commission stated.

“As far as the future trend is concerned, it is quite obvious that it will continue to decline because the [producer price index] has apparently turned negative last month, and when PPI has turned negative, the profits of industrial enterprises will go down,” Tang Jianwei, a senior economist at Bank of Communications in Shanghai, told Reuters.

Anxieties about rising unemployment are also increasing after a slew of statistics in the past few weeks.

“The potential growth rate is indeed dropping,” Wei Jianing, a research fellow at the Development Research Center of the powerful State Council, said. “This means unemployment will soon become an issue impacting social stability.”

For Beijing and Xi’s administration, that is a red line they can not cross. Pragmatism, in the end, will have to replace hype to solve US trade issues and ease the domestic downturn.

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