December 15 is approaching. That’s the date the US is scheduled to slap tariffs on an additional $160 billion of Chinese goods, including toys and smartphones. Beijing is under pressure to make a deal. The Chinese economy has been steadily slowing, thanks in large part to the trade war with the US and, simply, a larger denominator. As of September, China reported real economic growth of 6 per cent over the previous four quarters. Yet total energy usage grew at a tepid 4.4 per cent over that timeframe, suggesting that actual growth was lower than what Beijing reported.
Against this backdrop of growth deceleration, inflation in China is on the rise. China’s CPI advanced 4.5 per cent over the last 12 months, according to its National Bureau of Statistics. The index, which has tracked US CPI since 2017, broke away from US inflation trends in March, spiking in large part due to surging food prices. As of November, egg prices had advanced more than 10 per cent over the previous 12 months while the price of pork, a household staple, skyrocketed more than 110 per cent. Economists blame a Swine Flu outbreak in China that has killed or forced the culling of nearly half of the domestic pig population. Together, these two key commodities alone conspired to push overall food prices nearly 20 per cent higher year over year.
This suggests that Beijing is indeed eager to strike a trade deal before the December 15 deadline, but time is running out. Chinese officials consider the looming implementation of the 15 percent tariff on $160 billion of additional Chinese goods a potential disaster. Yet US trade negotiators are focused on finalizing the USMCA with Mexico and Canada and little attention is seemingly being paid to the standoff with China. We believe the most likely scenario is that a deal will not be reached by December 15, but the impending tariffs will be postponed. US Agriculture Secretary Sonny Perdue confirmed that view by telling Bloomberg, “I don’t think the President wants to implement these new tariffs but there’s got to be some movement on their part to encourage him not to do that and hopefully the signal that they sent over soy and pork reduction might be that signal in that way.” Investors may not get what they want next week, but we expect the downside risk of trade escalation will be diffused.