Chinese Vice Premier Liu He meeting U.S. President Donald Trump in May 2018

Expectations are high for the next round of trade talks in Washington. Vice Premier Liu He, China’s top trade negotiator, is expected to travel to Washington on January 30 to continue discussions, though the visit could be delayed if the partial shutdown of the U.S. government is not resolved by then. “It’s a positive development to show that enough progress was made in talks earlier this month,” said Nicholas Lardy, Senior Fellow at the Peterson Institute for International Economics, a Washington-based think tank. “But the chance is still slim that a complete resolution will be reached in this round.” “The most likely outcome is that the U.S. accepts all the concessions China has made and takes off the tariffs for a period to allow China time to enforce its promises. But most importantly, the U.S. ultimately needs to implicitly accept that China was never going to eliminate ownership restrictions by foreign owners in certain sectors such as media,” Lardy added.

Andy Rothman, former U.S. diplomat and China strategist has added his voice to the growing chorus of experts who believe a short-term resolution to the trade war can be reached within months. Rothman, who spent 17 years in the U.S. foreign service focused on China, and is now an investment strategist, said a deal could be struck by the summer, with domestic issues leading to increased motivation on both sides to reach an agreement. China is facing an economic slowdown that is beginning to show up in regional growth data, while the U.S. stock market has been underperforming, as the federal government shutdown continues. He expects the current negotiating deadline of March 1 to be extended. “Now that a negotiation is seriously under way, there is no reason for the U.S. to go back and put more tariffs in place, as long as progress is being made towards a deal,” he said. “It is rare that a trade negotiation gets finished on time and President Trump can extend the deadline.”

In this respect, he agreed with Robert Zoellick, former U.S. Trade Representative under President George W. Bush and former World Bank President, who also told the South China Morning Post last week that a deal could be struck. However, not everybody thinks an agreement is imminent. Many say that nothing of substance can be agreed between the countries within three months, including Tommy Wu, Senior Economist at Oxford Economics, who said: “We are unlikely to see negotiations completed before March 1, but because of the progress expected to be made in these talks, the U.S. is likely to postpone the tariff hike again.”

China could use large purchases of U.S. goods, promises of long-term dialogue on structural changes to its economy, and active cooperation on infrastructure projects to fashion a short-term compromise that would satisfy the United States and avoid a further escalation of the trade war, said Kent Calder, Professor at Johns Hopkins University’s School of Advanced International Studies in Washington and a Japan expert who served as a special adviser to the U.S. Ambassador to Japan in bilateral trade talks. “Japan made lots of purchases from the United States. For example, big Japanese airlines bought heavily from U.S. aircraft producers,” he said during a speech at the Center for China and Globalization in Beijing. But growing competition over technology is adding complexity to the bilateral negotiations, he warned, adding that negotiations to resolve these structural issues could take years.

Meanwhile, China has decided to double the quota under the qualified foreign institutional investors (QFII) scheme, through which overseas funds can buy China’s A-shares, to USD300 billion effective immediately. “This can be seen as China making a genuine gesture to further liberalize its capital market to facilitate the trade war negotiations with the U.S.,” said Commerzbank’s Senior Economist Zhao Hao. “It reflects China’s desire to reduce tensions with the U.S. towards resolving the trade issues, as the lack of market access has been one of the sticking points,” said Aidan Yao, Senior Emerging Asia Economist at AXA Investment Managers.

China has been introducing more financial opening up measures since last year as the dispute with the United States heated up. Beijing has promised that within three years it will fully scrap restrictions on foreign ownership in the financial service industry, including in banking and insurance. Through all programs, including the stock connect, foreign investors held about 6.7% of the total market cap of China’s stock market by the end of September, up from 5.16% at the beginning of 2018. To compare, foreign capital made up 24% of U.S. market capitalization, and 30% of Japan’s value at the end of 2017.