Hopes were high that a US-China trade deal would be done quickly because: 1) it makes economic sense for both parties and 2) President Trump is a 'deal maker'.
Contrary to the expectations of the media and many analysts, we believe the starting point for serious negotiations between US and China is some way off and that considerable time may be needed to get there. This week's US-China talks are likely to highlight the gulf between the two sides.
As a result, the risk of tit-for-tat trade actions is heightened because it is unlikely that formal negotiations will start ahead of the original deadline set for the US to make a decision on imposing tariffs.
In the face of open-ended and ill-defined demands, China is unwilling to consider any compromises to the "Made in China 2025" programme. Moreover, it will remember its experience with Commerce Secretary Wilbur Ross, who apparently reached several agreements with Chinese negotiators last year only to have Trump throw them out when he returned to Washington. The Chinese side will want to know who speaks with authority for the US on trade and economic issues so as not to repeat the Ross experience.
Detailed trade and economic negotiations are unlikely to get under way soon. We believe the most likely scenario for reaching serious negotiations will involve multiple deadlines and subsequent postponements, similar to what appears to be happening with the US-EU steel and aluminium talks, which have been postponed for another month.
When negotiations finally come, they are likely to be long and ugly.
No quick trade deal is done. Tit-for-tat tariffs are introduced and rounds of negotiations are delayed and cancelled. Investors gradually realise that trade war is real and increase risk premia priced into in stocks as a result. RMB falls by 9% vs USD between June and October despite Chinese authorities efforts to cushion the fall.