Nassim Khadem
A trade deal looks increasingly likely as senior US officials arrived in Beijing this week to continue trade talks with China.
But the uncertainty that has rattled global markets and caused the International Monetary Fund to downgrade its global growth forecasts is likely to continue for some time.
US President Donald Trump last year imposed import tariffs on hundreds of billions of dollars of Chinese goods and threatened more, after which China retaliated with tariffs of its own on the US.
The sticking point in upcoming trade talks is likely to be on intellectual property theft and state support for high-tech companies.
A note from UBS analysts says whatever the outcome of a trade deal, the US will likely further restrict Chinese investment in the US, as well as China's access to technology and high-tech products.
"Also, we expect the US to use the possibilities of increasing tariffs, financial sanctions or cutting China's access to technology as important tools to enforce any trade agreement," its note said.
"As such, export-oriented businesses operating in China and companies in the China-global supply chains will still face heightened uncertainties."
It was "highly unlikely" China would give up its ambition to acquire advanced technology under Made in China 2025 targets and reduce related state subsidies, UBS said.
Reform of state-owned enterprises (SOEs) has been a key element of China's economic reform process.
"While China may deepen SOE reforms, these reforms are likely to be designed to make SOEs more efficient and stronger, not to disappear or privatized," UBS analysts said.
When a trade deal could take place
US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will be participating in talks with Chinese officials this week.
The timing and location for the next meeting between Chinese President Xi Jinping and Mr Trump have not been agreed on, but UBS thinks it is likely that officials will make some progress towards a broader framework for the eventual trade deal.
The deadline is March 1, but UBS said it could extended and sealed by the two presidents later in March or April.
"This is in line with our current baseline of an extended deadline for trade talks and no tariff increases on March 2, while the probability of a broader trade deal with existing tariffs being rolled off over the coming year has increased," it said.
UBS said that the US would not raise the 10 per cent tariffs on $200 billion of Chinese exports immediately after March 1, but existing tariffs may stay for a while longer or be rolled off in coming months.
Both sides would agree on a regular monitoring mechanism to verify the implementation of the terms of the trade deal.
What areas China may give ground on
In China's case, UBS said the country would agree to significantly increase imports from the US, especially on agricultural and energy products. It noted that imports of soybeans had already started.
"China will commit to enhancing IP protection, ban forced technology transfers, open domestic markets further, reduce subsidies and excess capacities, and embark on other structural reforms," UBS said.
China would also act to enhance IP protection through amendment of Chinese patent law and a better enforcement mechanism, meaning "US sanctions and restrictions on Chinese tech industry may be less severe than otherwise would have been."
China would roll off of higher tariffs on imports from the US, such as on automobiles, and enforce the ban on exports of the illegal substance Fentanyl to the US.
It would expedite the approval of US companies entering into various sectors in China, including in financial services, agriculture and automobile sectors.
Both would sides agree to cooperate on cyber security and international issues, and China would reiterate its commitment to refrain from sharp Chinese Yuan depreciation or keep it stable.
What the United States may agree to
In the case of the US, it would not increase tariffs further on imports from China on March 2.
It would "agree to continue negotiations and may even agree to gradually roll off some existing ones".
"In addition, the US may impose less severe sanctions/export restrictions against Chinese tech companies in the near term," the note said.
But all this would require ongoing monitoring and negotiations.
"The US will likely demand regular monitoring and verification on China's commitment on better IP protection, domestic market opening beyond granting of licences and approvals, ban on forced technology transfers, reduction of non-tariff barriers, and reduction of subsidies in various sectors and other market-oriented reform," UBS said.
"Cyber security and international cooperation issues will be ongoing work for both sides."
The economic upside of a trade agreement
UBS said while China's export and GDP growth would be stronger than they had initially forecast, "uncertainties about future tariffs and tech restrictions from the US will likely linger and dampen capex in China".
"Moreover, we think policy stimulus may also be held back somewhat as economic activity and confidence rebound," it said.
"For example, quasi-fiscal spending may not expand as much and liquidity and credit easing may not be as large."
China's 2019 GDP growth would likely be limited to 6.2 per cent to 6.3 per cent, it said.
A trade deal would also help lift sentiment in export-related sectors and be positive for the more export-oriented economies in East Asia.
Stocks UBS predicts will be beneficiaries of better than expected US-China trade negotiations favours include WH Group, Nine Dragon, Pacific Basin, China Merchant Ports and Great Star.
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