Equities have recently made a remarkable comeback, and some who are new to trading want to cash in. Photo: AFP

Optimism has turned to euphoria after United States President Donald Trump pulled back from ratcheting up the pressure on China at the weekend.

Intensive talks in Washington last week appear to have laid the foundations of a deal to end the trade war between the world’s two largest economies.

News of a planned summit between Trump and China’s President Xi Jinping was announced, although a date has yet to be finalized, as well as confirmation that the US deadline of March 1 would be extended.

In the blink of a tweet, the threat of added tariffs on Chinese imports worth up to US$250 billion was put on ice, defrosting what has been described as a new economic Cold War.

“Frank exchanges have been a catalyst in settling the disputes,” the official state-run Xinhua news agency said in a commentary.

While perhaps premature with the statement, it added:

“It is the best choice for both China and the United States to keep consultations on an equal footing and in the light of the consensus reached by the two presidents before a mutually beneficial agreement [can] be reached.”

Yet, there is still a great deal of work to be done on refining the small print and agreeing to an enforcement mechanism which both sides can sign off on.

A loose accord has been hammered out on issues ranging from intellectual property protection and forced technology transfers to agricultural exports, services and exchange rates.

“[We] have made substantial progress in our trade talks with China on important issues. As a result of these very productive talks, I will be delaying the US increase in tariffs now scheduled for March 1,” Trump said on Twitter.

He also revealed that a planned summit with Xi at his Mar-a-Lago estate in Florida has been arranged to cement the deal.

But while specific details are still scarce, behind-the-scenes talks will continue ahead of their meeting.

One key sticking point in the run-up to last week’s discussions revolved around structural reforms, which Washington was looking for and Beijing was showing no signs of ceding ground to.

Significantly, there appears to have been movement in that direction. But there was hardly a mention about state-owned enterprises or China’s broader economic model of government subsidies, concerns shared by the European Union and other US allies.

“We can’t be sure whether this constitutes a major cave or success because we don’t know the details of what has been negotiated. But … agreeing to extend negotiations a few more weeks definitely is in China’s interests,” Scott Kennedy, a China expert at the Center for Strategic and International Studies in Washington, said.

“At this point, the US has likely gotten all it’s going to get out of China,” he added.

Lasting nearly a year, the trade war has resulted in tit-for-tat tariffs on hundreds of billions of goods and products entering the US and China.

It has also spooked global markets with the head of the International Monetary Fund, Christine Lagarde, warning that rising tensions between Washington and Beijing were a “major risk” to world economic growth.

“I cross my fingers every morning and my toes every evening because I hope that it is going to end up with a way to fix the system, not break it,” she said last week.

At least the positive conclusion of the third round of talks since a truce was put in place last year triggered a Monday rally on Asia markets.

The big winner was China’s Shanghai Composite Index, which surged 5.6% and moved into bear market territory. It is now at least 20% up from intraday lows seen in early January.

Just behind was the Shenzhen Component Index, which soared 5.5%, while the Nikkei 225 in Tokyo edged higher to close at 21,528.23 points. In Hong Kong, the Hang Seng Index finished 0.5% up.

“The high-frequency engagement between Beijing and Washington at a senior level implies that both sides are looking for some form of settlement,” Tai Hui, the chief market strategist for Asia-Pacific at JP Morgan Asset Management, said.

‘Strong performance’

“I think the market has been moving towards this view in recent weeks, as shown by the strong performance in China A Shares and Asian equities.”

Still, it might be premature for rhetorical bouquets. As Xinhua concluded in its commentary:

“The emergence of new uncertainty cannot be ruled out, and the long-term nature, complexity, and difficulty of China-US trade frictions must be clearly recognized.”

The last point was underlined by Ryan Hass, an academic at the Center for East Asia Policy Studies, and Mira Rapp-Hooper, of the John L. Thornton China Center.

Looking ahead, they warned that the rivalry could break out again into an economic conflict.

“A critical question is whether China’s core interests and economic and major power objectives require it to substantially weaken the US role in the [Asia] region, or whether it can accept a strong American presence, so long as it is able to preserve its form of governance and protect its ‘core interests,’” they wrote for the Brookings Institution, a think tank based in Washington.

“The answer is crucial to determining the compatibility of the two countries’ interests,” they added.

Indeed, we have seen in the past how optimism can quickly turn to pessimism in the drama between the world’s two major power brokers.

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