Data is Showing a Fragile Economy as U.S. Negotiators Land in Beijing

Can U.S. Negotiators End the Tariff War

U.S. trade negotiators landed in Beijing, Tuesday, seeking the possibility to end the tariff war, as weak economic data underscored the stakes for the global economy.

Earlier, China’s first official gauge of the manufacturing sector in April fell, signaling that more work is needed to bed down the economic stabilization seen in the first quarter. Industrial production also tumbled in South Korea and Japan, and gross domestic product growth slowed a notch in Taiwan.

U.S Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are heading into a new round of talks before Chinese Vice Premier Liu He goes to Washington next week.

“We’re looking forward to productive discussions over the next few days,” Mnuchin told reporters at his hotel. “We hope to make substantial progress in these two meetings,” referring to the sessions in Beijing and in Washington, he said. Mnuchin refused to comment on specific issues, saying the discussions “have been quite broad,” and “we’ve made a lot of progress.”

The silver lining in the Chinese PMI data may be an uptick in China’s new export orders, which though still contracting in April were much higher than in the first quarter and could signal resilience in the global economy.

“Incremental Chinese stimulus will prevent a hard landing there, but will be insufficient to revive global growth,” said William Adams, senior international economist at PNC Financial Services Group Inc. in Pittsburgh who previously worked for the Conference Board in Beijing. “For that, the Eurozone and Japan need to shake off their funk and get back to trend.”

Asian stocks retreated with U.S. futures Tuesday amid the disappointing data, though onshore Chinese stocks rose. The Shanghai Composite Index rose 0.5 percent, the largest rise in more than a week.

While both the U.S. and China are eager to reach an agreement, the possibility remains that President Donald Trump would walk away from the negotiating table if he isn’t satisfied with how talks are progressing, according to a senior Trump administration official who spoke on the condition of anonymity this week. The latest round of China-U.S. trade talks will get underway with significant issues still unresolved but with enforcement mechanisms “close to done,” Mnuchin said.

“We still have more work to do,” he said in an interview on Fox Business. “If we get to a completed agreement it will have real enforcement provisions,” adding that those provisions are “close to done” and only need “a little bit of fine-tuning.”

China’s manufacturing purchasing managers index stood at 50.1, down from 50.5 the previous month, according to the National Statistics Bureau. The non-manufacturing PMI, which is a gauge of services and construction, stood at 54.3 versus 54.8.

China’s growth was stronger-than-expected for the first quarter of 2019, but there is no clear sign of what a trade deal with the U.S. will look like and falling imports are undercutting the economy of the region, which indicates weak domestic demand.

New orders softened to 51.4 from 51.6, while new export orders recovered to 49.2, still in contraction but much higher than in the first three months of 2019. A separate PMI gauge from Markit Economics showed a similar trend, with the factory gauge dropping to 50.2 from 50.9.

“Today’s PMI data suggest the strong pace of March activity is unlikely to continue,” said Michelle Lam, Greater China economist at Societe Generale SA in Hong Kong. “Nevertheless, activity has at least gained more traction compared to the turn of the year. The feed-through of tax cuts should put the economy on a stable footing going forward.”

Trade Dependency

South Korea’s industrial output fell 2.8 percent in March from a year earlier, compared to an expected 1 percent fall and a 3.4 percent contraction a month earlier. Japanese production dropped 4.6 percent in the same period, data last week showed. Two other trade-dependent economies which act as bellwethers for the global outlook release reports this week.

Hong Kong’s gross domestic product will expand at a slower pace in the first quarter than the fourth because of the high base in the first three months of last year and due to external uncertainties, according to the city’s financial secretary.

There will be a “small increase” in GDP, Financial Secretary Paul Chan wrote in his blog on Sunday. Manufacturing and trade in most Asian countries remained weak in the first quarter, with the economies of the U.S. and Europe still sluggish, according to Chan.

Taiwan’s economy grew by 1.72 percent in the first quarter versus the same period a year earlier, slowing less sharply than expected, according to data released Tuesday.

Some economists were less concerned about China’s data.

“With a strong first quarter GDP, growth doesn’t seem to be a big concern,” and a number above 50 is already a good start for the second quarter, said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “New export orders is a silver lining.”