China and U.S.: A positive outcome matters

3 min
Mahamoud Islam
Mahamoud Islam Senior Economist for Asia

China-U.S. trade talks got off to a good start on Monday. Vice Premier Liu He unexpectedly participated in the talks that were supposed to gather low ranking officials. While there is no clear information filtering, both sides reported a positive development so far. Note that the two countries have time until March to find an agreement. Otherwise, the Trump administration would likely proceed with raising tariffs to 25% on USD200bn worth of Chinese imports. Such a rise would undermine the already weakening economic performance in China. Industrial profits growth softened to +11.8% y/y in January-November (after +13.6% in January-October). And vehicle sales decreased by -13.9% y/y in November. The official Manufacturing PMI fell below the 50 thresholds (to 49.4) in December, signaling contraction. So far, our scenario assumes a positive outcome of the trade talks. This would translate into slower but still resilient Chinese economic growth of +6.3% in 2019. If the two countries fail to agree, China’s GDP growth would be cut by -0.3pp within the next two years.