China's Top Economic Official Unexpectedly Joins Beijing Trade Talks

Despite confirming last week that this week's initial round of trade talks would involve only "mid-level" officials, Bloomberg reported Monday that Chinese Vice Premier Liu He - the country's top economic policymaker and the official tasked with overseeing the trade negotiations - had made a brief appearance at Monday's initial talks in Beijing - what BBG interpreted to be a positive sign for financial markets desperate for an end to the destabilizing trade dispute.

Over the summer, Liu managed to work out a deal with Treasury Secretary Steven Mnuchin during meetings in Washington,  though the deal was swiftly scrapped by President Trump.

According to Bloomberg, Liu's presence suggests that China is taking the talks seriously.

Liu’s participation in the meeting, held at the ministry’s premises, signals that China is attaching high importance to the talks, even if the main participants this time are mid-level officials. While markets have rallied the past few sessions, a wider downturn over the past month and a deepening economic slowdown are increasing pressure for a deal.

On the other hand, in a report published in the nationalist Global Times, Chinese officials asserted that the US would suffer a greater economic hit than China should the talks fail (though few expect a "sweeping deal" to be reached during the preliminary talks). It also noted that this round of talks comes at a time of reduced tensions between Beijing and the US.

Unlike previous rounds of trade talks at the height of the trade frictions, when officials engaged in a war of words, this meeting comes at a time when the two sides have toned down their criticism of each other.

Trade officials have been in close contact over the past month and top leaders have exchanged pleasantries over the phone. On December 30, Chinese President Xi Jinping and US President Donald Trump spoke on the phone and expressed their willingness to reach an agreement, Xinhua reported.

"This offers great support and momentum for the two working teams to reach an agreement," Bai Ming, deputy director of the Ministry of Commerce's International Market Research Institute, told the Global Times on Sunday.

The talks also come as both countries see ominous signs in their economic outlook due to the trade war, compelling both sides to end their trade war, analysts noted.

As the two countries slapped tariffs on each other's goods worth billions of dollars, warning signs are flashing for both the Chinese and US economies. In China, economic growth has slowed to its weakest pace in decades, with analysts forecasting a further slowdown. In the US, though growth remains solid, the recent turmoil has led to the worst performance of the US stock market in a decade, and new data suggests that the country's manufacturing sector is expanding at its slowest pace in two years.

"No doubt, with both countries facing an economic slowdown and market instability, there is greater willingness from both sides to reach an agreement," said Bai, particularly from the US. "US officials have said that they can win a trade war easily, but now they may think twice."

China has released few details about Liu's appearance, and it's unclear what was discussed or why he chose to join the talks. Though it's worth noting that turbulence in domestic markets and a worsening economic slowdown are ratcheting up pressure on the Chinese leadership to deliver a solution that could offer some stability.

It’s unclear how long Liu stayed, or what he discussed. The Ministry of Commerce didn’t immediately respond to a fax seeking comment on Liu’s appearance. U.S. Trade Representative Robert Lighthizer is expected to meet with Liu later this month, a person familiar with the situation said last week.

The talks in Beijing this week are the first between the US and China since Trump met with Xi in Argentina last month, where they agreed to a temporary truce whereby the US would delay its next round of tariff escalation for three months as the two sides tried to hammer out a deal.

Another round of discussions involving senior officials, including US Trade Rep. Robert Lighthizer, whose office is leading the negotiations, is expected next week. Meanwhile, President Trump is expected to meet with Chinese Vice President Wang Qishan at the World Economic Forum in Davos later this month, where Wang is expected to deliver a keynote address. On the US side, this week's talks are being led by Deputy US Trade Representative Jeffrey Gerrish.

In other efforts to revive collapsing economic growth, China embarked on its first round of stimulus for the new year late last week when China cut its reserve requirement ratio by 1% boost liquidity ahead of the Chinese New Year.