US- China Trade Talks Break Down After US Rejects "Frustrated" Beijing's Offer To Cut Deficit

While much of the overnight session was market by the previously discussed buying euphoria that sent futures over 1% higher after Monday's disappointing close following a "conciliatory" speech by China's president Xi who - once again - promised to open China's economy and lower import tariffs, there was a moment of sheer angst when just before 4am ET, Bloomberg almost broke the narrative of Xi trade war "reconciliation" when it reported that trade talks between the US and China broke down last week after the Trump administration demanded that China curtail support for high-technology industries, which in turn spiked the JPY, if only briefly.

As Bloomberg details, the tentative negotiations broke down when Liu He, a vice premier overseeing economics and finance, told officials last Thursday that Beijing had rejected a U.S. request to stop subsidizing industries related to its “Made in China 2025” initiative, a key target of Peter Navarro's ire which he has accused China of using to force companies into transferring technology in areas like robotics, aerospace and artificial intelligence.

Curiously, China's rejection of U.S. demands came after Beijing had already offered to narrow the trade deficit by $50 billion, including by importing more liquefied natural gas, agricultural products, semiconductors and luxury goods. The plans also included opening the financial sector at a faster rate and giving U.S. companies more access to China’s booming e-commerce market, the person added.

In other words, China was willing to make a major concession in the escalating trade war, but the Trump administration rebuffed it when it considered that Beijing would not taper the "2025" initiative, and also coincides with Trump's escalated demand last Thursday that called for an addition $100 billion in tariffs.

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After negotiations collapsed, vice premier Liu reportedly said President Xi Jinping was ready to fight back hard if Trump wanted a trade war.

China was open to talks with the U.S., but wouldn’t initiate them under the current conditions, the person said, citing Liu.

What this dust up suggests, is that contrary to the overnight euphoric "hot take" of Xi's speech, "the trade dispute won’t be resolved quickly, despite Trump’s optimistic tweets and Xi’s conciliatory address to a regional economic forum Tuesday" according to Bloomberg.

In fact, it's worse: "In recent days, Chinese officials have expressed increased frustration with the U.S., with the foreign ministry on Monday calling talks “impossible” under current conditions."

To be sure, Xi did all he could to exude a sentiment of optimism during his Boao speech:

Xi pledged a “new phase of opening up.” He reiterated plans to allow more foreign participation in sectors like automobile manufacturing and banking, and said China would strengthen measures to protect intellectual property rights.

Xi also called on countries to export high-technology goods to China, which has been a point of contention with the U.S. A commentary in the official People’s Daily after the speech said Beijing would never open at the expense of its interests -- a signal that it would continue supporting “Made in China 2025.”

How did Trump react to the Xi speech? While we have yet to get a tweet from the president on the topic, a White House official who watched Xi’s speech told Bloomberg he welcomed remarks on intellectual property while saying that actions speak louder than words.

Trump’s administration was unified in the view that U.S. jobs were endangered by what it called China’s forced technology transfers and state-directed intellectual property theft, the official said.

And just to underscore what happens next, Bloomberg again repeats that Liu's remarks  - who is taking the lead on the government’s response to Trump’s trade moves - "suggest the dispute won’t be resolved easily." The meeting was held before Trump instructed officials to consider tariffs on an additional $100 billion in Chinese imports, bringing the value of the nation’s products set for higher duties to about $150 billion. The U.S.’s bilateral trade deficit was $375 billion last year.

Shortly thereafter, China vowed a harsh response to Trump’s latest threat, helping to spur a selloff that prompted the S&P 500 Index to fall 2.2 percent last Friday. Geng Shuang, a foreign ministry spokesman, said Monday that it was “even more impossible” for trade talks to take place under the current environment.

“This trade conflict was initiated by the U.S. alone and it is entirely the one to blame,” he said. “The U.S. is wielding the big stick of trade sanctions while keeping saying they are willing to talk. I am not sure who the U.S. is putting on such acts for.”

We wonder how long it will take algos to realize that what really matters from the overnight newsflow is this very explicit deterioration in trade talk which guarantees that the trade conflict isn't going away any time soon, rather than Xi's speech which, as UBS' Paul Donovan wrote earlier, "recycled his January Davos remarks."