Dollar near one-month high on bounce in U.S. yields, weak pound

TOKYO (Reuters) – The dollar held near a one-month high against its peers on Wednesday, supported by a rebound in U.S. yields and weakness of the pound as its battering from uncertainty about Brexit continued.

The greenback was lifted as long-term U.S. Treasury yields bounced from three-month lows. [US/]

The dollar index .DXY versus a basket of six major currencies stood at 97.420 after rising overnight to 97.545, its highest since Nov. 13.

“In addition to higher Treasury yields, the weakening pound is providing a key boost to the dollar,” said Yukio Ishizuki, senior forex strategist at Daiwa Securities in Tokyo.

“With Brexit talks seemingly headed towards a dead end, this has been a golden opportunity for speculative market players to short the pound.”

Sterling took a big hit at the start of this week after British Prime Minister Theresa May delayed a parliamentary vote on her Brexit deal.

The pound GBP=D4 suffered further on Tuesday on media reports that May’s parliamentary colleagues believed they had sufficient numbers to mount a no-confidence vote in her leadership.

The British currency was little changed at $1.2495 after dropping to $1.2480 overnight, its weakest since April 2017. The currency has lost 1.8 percent this week.

The euro was a shade higher at $1.1333 EUR= after shedding 0.3 percent the previous day.

The dollar was a shade higher at 113.49 JPY= after touching a one-week peak of 113.52.

China’s yuan was firmer in offshore trade CNH=D4 at 6.886 to the dollar, extending gains from the previous day.

The yuan firmed on Tuesday on news that Beijing and Washington were discussing the next steps in their trade talks.

U.S. President Donald Trump on Tuesday told Reuters he would intervene in the Justice Department’s case against a top executive at China’s Huawei Technologies HWT.UL if it would serve national security interests or help close a trade deal with China.

The Australian dollar, a gauge of broader risk sentiment, was up 0.35 percent at $0.7228 AUD=D4.

The 10-year Treasury note yield US10YT=RR inched up to 2.889 percent after rising more than 2 basis points on Tuesday.

The yield had dropped to a three-month low of 2.825 percent at the start of the week, with dovish comments from Fed officials and soft U.S. data further reinforcing views of a slowdown in the tightening cycle.

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Dollar slips as U.S. job data fans growth worries; pound, yuan on backfoot

TOKYO (Reuters) – The dollar slipped against the yen and the euro on Monday after soft U.S. payrolls data fuelled speculation that the Federal Reserve may stop raising interest rates sooner than previously expected.

The British pound also was on the defensive as Prime Minister Theresa May’s deal to exit the European Union looks set to be rejected by parliament on Tuesday, while the Chinese yuan dipped in offshore trade following weak trade and inflation data over the weekend.

“We have rising tensions between the United States and China over Huawei and the Brexit vote in the UK parliament. The risk-off mood is likely to prevail for now,” said director of forex at Societe Generale.

The dollar slipped 0.2 percent against the yen to 112.52 JPY=, edging near Thursday’s 5 1/2-week low of 112.23.

U.S. non-farm payrolls increased by 155,000 jobs last month, below economists’ median forecast of 200,000 jobs.

Some Fed policymakers have struck a cautious tone about the economic outlook, possibly flagging a turning point in its monetary policy.

Federal Reserve Governor Lael Brainard said on Friday the economic picture was broadly positive but that risks were growing overseas and in the corporate debt markets at home.

St. Louis Federal Reserve Bank President James Bullard repeated his call for the Fed to pause its current cycle of interest rate increases.

Investors are growingly worried that rising tensions with China could took a toll on the U.S. economy.

Although U.S. President Donald Trump and Chinese President Xi Jinping struck a 90-day truce on tariffs earlier this month, U.S. Trade Representative Robert Lighthizer said on Sunday there is a “hard deadline”, noting U.S.-China trade negotiations need to reach a successful end by March 1.

New tensions between the two countries flared last week after Meng Wanzhou, chief financial officer of China’s tech giant Huawei Technologies HWT.UK was arrested in Vancouver at the request of the United States.

As the dollar wilted, the euro edged up 0.2 percent to $1.1400 EUR=, even as “yellow vest” anti-government protesters wreaked havoc in Paris during the weekend.

French President Emmanuel Macron will address the country at 2000 Paris time (1900 GMT) on Monday as he seeks to placate the protesters.

In London, Theresa May faces an internal revolt against her Brexit deal ahead of the crucial vote in the parliament on Tuesday. Despite the bleak outlook, May plans to push ahead with the vote while senior lawmakers in her own party piled pressure on her to go back to Brussels and seek a better offer.

A rejection could throw plans for Britain’s exit into turmoil and leave her own political future hanging in the balance.

The British pound GBP=D3 was softer at $1.2722. Against the euro, it changed hands at 89.65 pence per euro EURGBP=D4, near its weakest level since late September.

The Chinese yuan ticked down 0.15 percent in offshore trade after weak data pointed to a further cooling in the world’s second-biggest economy.

China’s November exports rose just 5.4 percent from a year earlier, the weakest performance since a contraction in March and well short of the 10 percent forecast in a Reuters poll, adding to evidence that demand is weakening globally.

Import growth was 3 percent, the slowest since October 2016, and a fraction of the 14.5 percent seen in the poll.

The downbeat trade data reinforced views that Chinese authorities will have to roll out more support and stimulus measures soon to stabilise the economy, even if a trade deal with Washington is reached.

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BOJ Kuroda: No preset idea of means for further easing

TOKYO (Reuters) – Bank of Japan Governor Haruhiko Kuroda said on Friday he did not have any preset idea of what tools the central bank should use in case it needs to ramp up monetary stimulus in the future.

“We need to carefully weigh the cost and benefit of any step we take. At present, I don’t see the need to take additional monetary easing steps,” Kuroda told parliament.

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Dollar struggles on Fed pause talk ahead of jobs data

TOKYO (Reuters) – The dollar struggled to recover in Asian trade on Friday, hobbled by fresh speculation that a widely expected rate hike later this month could be the last before Federal Reserve hits the pause button on its tightening cycle.

Investors have been alarmed by recent sharp falls in U.S. treasury yields, with an inversion of the yield curve signaling a sharp economic slowdown or even a recession down the road.

Their immediate focus was on November U.S. non-farm payrolls, unemployment and wage data due to be released later on Friday for clues to how the world’s top economy is faring.

“Arguably, one of the strongest parts of the U.S. economy has been the labor market,” said Chris Weston, Melbourne-based head of research at foreign exchange brokerage Pepperstone. “If we see any cracks appearing in there, the U.S. dollar will start to fade off.”

Dollar investors were given more reason to be cautious after the Wall Street Journal reported Fed officials are considering whether to strike a wait-and-see attitude after a likely rate increase at their meeting in December.

The dollar index .DXY, which measures the greenback against a basket of six major peers, was virtually flat at 96.802. The index shed 0.3 percent during the previous session, closing at one-week low and down 0.9 percent from a 17-month peak hit on Nov. 12.

The benchmark U.S. 10-year Treasury yield US10YT=RR was last at 2.896 percent after dipping overnight to its lowest level since late August.

The dollar has slipped after Fed Chairman Jerome Powell said last week that U.S. interest rates were nearing neutral levels, which markets interpreted as signaling a slowdown in rate hikes.

If the Fed raises interest rates as expected at its Dec. 18-19 meeting, it would be the fourth hike this year, and investors are focused on how much further the tightening cycle has to run.

“The guidance going forward will be key to yields and equity market moves, which right now foreign exchange markets seem to be reacting to,” said Bart Wakabayashi, Tokyo branch manager at State Street Bank.

Interest rate futures implied traders see no more than one rate increase from the Fed in 2019, compared with previous expectations for possibly two rate hikes, according to CME Group’s FedWatch program.

On Friday, the dollar was steady against the euro EUR= at $1.1378. Against the Japanese yen JPY=, it tacked on 0.1 percent to 112.79 yen.

The single currency had gained 0.3 percent against the dollar during the previous session while the yen rose about a quarter of a percent.

The Canadian dollar sat at C$1.3388, basically unchanged from Thursday’s close. The loonie had hit a 1-1/2-year low of C$1.3445 against the greenback overnight after the Bank of Canada suggested the pace of future rate hikes could be more gradual.

The Australian dollar AUD=D4 was flat at $0.7236, not far off a three-week trough of $0.7192 hit on Thursday.

The greenback has been pressured this week by an inversion in part of the U.S. yield curve seen as an early warning sign for a potential recession.

The spread between the two-year and five-year U.S. Treasury yields inverted this week and the two-year/10-year spread was at its tightest in more than a decade amid a sharp fall in long-term rates.

Historically, the economy has taken anywhere between 12 months and 24 months to fall into a recession when the yield curve inverts.

Some market participants believe the dollar index may have peaked out, State Street’s Wakabayashi said.

Financial institutions and companies usually take extra efforts to fund their operations over the year-end, which often leads to increased demand for the dollar as its the world’s most liquid currency, but Wakabayashi believed it was less pronounced this year.

“The dollar funding over the calendar year-end hasn’t really been as aggressive as we’ve seen in the past few years,” he said. “If the natural demand does not seem to be appearing in the market, then I think the people who are holding on to those dollars may look to unwind some of those trades.”

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Optimism in China after US trade thaw but hard work just starting

With chances of G20 breakthrough always slim, experts say brief truce and restart of negotiations was next best thing.

    Beijing, China – A sense of relief spread across China as President Xi Jinping and his United States counterpart, Donald Trump, agreed over the weekend to a 90-day halt to new tariffs as the world’s two leading economies engage in new negotiations aimed at reaching a broader deal.

    The smiles and friendly handshakes exchanged between the two leaders on the sidelines of a Group of 20 meeting in Argentina contrasted sharply with the testy exchanges and thinly-veiled animosity that had for months defined the US-China relations amid a bitter tit-for-tat trade dispute.

    The news of the ceasefire, which will see the US not raise tariffs on $200bn of Chinese goods from 10 to 25 percent on January 1, as previously threatened, as well as prevent a potential retaliation from Beijing, was welcomed by investors in China and beyond.

    “We dodged the next bullet … the markets were definitely happy,” said Andrew Polk, an economist with Beijing-based consultancy Trivium, citing the yuan’s strong advances in the immediate aftermath of the truce – the Chinese currency’s two-day gain of 1.7 percent on Tuesday was its biggest for more than a decade.

    But immediate joy has since given way to “cautious optimism” as confusion over what was actually agreed between the two sides led to some gains being lost, added Polk.

    Renewed duty threats by Trump, who on Tuesday called himself a “Tariff Man” on Twitter, did not help either.

    “There’s a sense that’s there no time to pop the champagne – it’s time to get to work,” said Polk. 

    Jacob Parker, vice president of China Operations at the US-China Business Council, agreed. While expressing the US business community’s satisfaction for the truce, he was quick to note that a long road lies ahead.

    “This outcome delays further escalation and gets both sides back on track to find a sustainable long-term solution to the challenges in the relationship,” Parker said.

    But others said the pause itself should not be underestimated.

    Zhu Feng, a professor of international relations at Nanjing University, called the trade thaw an extremely positive development that offers a chance to avert a broader crisis between the two sides.

    The conflict isn’t just about increasing tariffs, but also different ideas and positions taken by China and the US,” Zhu said.

    “As the relationship worsens, the result will be more than just a trade war,” he added, pointing to the tighter controls on Chinese students heading to the US as an example of deepening hostility.

    In June, the US State Department curbed visa lengths for Chinese graduates studying aviation, robotics and advanced manufacturing to one year from five, citing national security concerns.

    “Growing negative sentiments between China and the US is the most frightening factor in China-US relations,” Zhu said. “So the temporary truce is really important to alleviate increasing opposition between the two countries.”

    Shi Yinhong, a professor in Beijing’s Renmin University, had a more somber outlook. “It’s not a big deal. If negotiation fails after 90 days, things will get worse,” he said.

    Shi argued that reaching a broader agreement depends on the flexibility of the US side.

    “If Trump is very harsh with his demands, then meeting those demands would mean tremendous changes to China’s national affairs and industrial policies,” Shi said. “It will decrease the chance of the Chinese government accepting them.”

    Many analysts see the tight, 90-day negotiating window as short when taking into account the US list of demands, which is believed to include requirements for China to act on issues such as forced technology transfer, intellectual property protection, non-tariff barriers and alleged cyber theft.

    In a statement last month, the US Trade Representative’s office said China was continuing “unfair practices”, alleging that Beijing’s IP and technology transfer policies are causing multibillion dollar worth of damages to US companies.

    “It is unreasonable to assume that all challenges in the relationship can be resolved in 90 days,” said Parker, adding that setting medium- and long-term targets, as well, is the best way to “ensure sustainable engagement between the two sides”.

    Chinese action

    Despite the persisting scepticism, the Chinese commerce ministry on Wednesday expressed its “confidence” that an agreement can be reached within the next 90 days.

    “China will start with the implementation of the specific matters in which consensus has been reached, the sooner the better,” it said in a statement, without providing more details.

    Already, just days after the temporary ceasefire, China has announced a number of significant steps, including a slew of penalties for intellectual property theft that could restrict companies’ access to borrowing and state-funding. According to China’s National Development and Reform Commission, the 38 different punishments will be applied to IP violations starting this month. 

    On the trade front, the White House says China has agreed to purchase more agricultural, energy, industrial and other products from the US. Trump also tweeted that China had “agreed to reduce and remove tariffs on cars coming into China from the US” – currently the duties stand at 40 percent. Details on this, however, have been scarce, and Beijing has not confirmed the move.

    ‘Negative sentiment’

    Whether or not the US and China can transform vague commitments into concrete outcomes over the next 90 days, however, remains unclear. But what is certain, Shi said, is that stakes are high.

    “If an agreement isn’t reached, there will be significant losses for China” and “damage done to both the US and Chinese economy,” he says.

    So far, China has managed to avoid any major economic fallout from the trade war.

    “Ironically, we’ve so far seen the opposite,” said Polk, noting how companies have rushed to pump up orders to beat tariff deadlines. “Of course, if we see the 25 percent in tariffs implemented this will turn on its head.”

    “Most Chinese exporters say, ’10 percent is no big deal, we can eat that. But 25 percent, we’re going to have a problem with’. So far there hasn’t been much of a macro impact on China, but we could see one if the tariff hike happens,” Polk added.

    Ultimately, China’s government doesn’t only have businesses to answer to. Trade tensions with the US are taking place against a backdrop of slowing economic growth and lower state revenue.

    “The trade has increased the pressure on China’s economy,” Shi said. “And there are psychological impacts,” he said, referring to an increasingly worried Chinese population.

    It’s a view echoed by Polk.

    “Already, there’s this feeling of domestic uncertainty, policies not working, a hurting private sector  … and then you throw the trade war on top.

    “It’s absolutely more of a very negative sentiment out there.”

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    Japan slides in key Asia corporate governance ranking, ties with India

    HONG KONG (Reuters) – Japan slid three places to seventh in a widely watched ranking of corporate governance in Asia, tying with India but languishing behind the likes of Thailand and Malaysia.

    The fall is part of a biennial survey by the Asian Corporate Governance Association (ACGA) and CLSA, the Asia-focused brokerage, and comes as governance in Japan is in the spotlight following the arrest last month of Nissan (7201.T) Chairman Carlos Ghosn for alleged financial misconduct.

    Ghosn has yet to make any statement through his lawyers, but Japanese media reported that he has denied the allegations.

    Japan, home to the world’s second-largest stock market, has been held up as a leading light by governance advocates after its stewardship code, introduced in 2014, pushed domestic fund managers into more actively questioning boards and management.

    But the ACGA/CLSA report criticized a failure by Tokyo to take harder, regulatory action.

    “While important, the focus on soft law rather than hard regulatory change means that regulators have not been addressing shortcomings in minority shareholder rights,” they said in their Corporate Governance Watch report, which has been grading countries in the region for more than a decade.

    The report also warned that while Japanese efforts to improve governance by introducing better board-level oversight via independent directors and audit committees looked good on paper, boardroom reality had changed little in many firms.

    Australia ranked top in the survey with a score of 71, despite revelations this year of widespread misconduct in its financial sector. Hong Kong and Singapore were next with 60 and 59 respectively. Japan was the biggest faller on 54.

    While the report praised governance in Australia, both Hong Kong and Singapore were criticized after their stock exchanges changed rules this year to allow companies to list with two classes of shares.

    Dual-class shares (DCS) offer extra voting power to top executives, which the bourses hope will attract large companies, particularly emerging technology giants, to list, but the structures are opposed by governance activists who warn that they can be abused by company insiders.

    Jamie Allen, secretary general of the ACGA, said in the report that the association was concerned about the potential for “contagion” after the rule change in Hong Kong and Singapore, pointing to indications that South Korea was also considering changing its rules.

    “Today advocates of DCS are trying to make it the new normal, accompanied by an obsessive focus on IPO (initial public offering) numbers as the only yardstick that seems to matter when measuring capital market success,” the report said.

    China, the Philippines and Indonesia ranked bottom in the report, with scores of 41, 37 and 34 points respectively.

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    Pakistan party leaders in blasphemy case charged with terrorism

    Khadim Hussain Rizvi and three others of TLP charged following protests over Aasia Bibi’s acquittal in blasphemy ordeal.

      Pakistan has charged a right-wing leader with treason and terrorism over his party’s disruption of daily life with nationwide rallies following the acquittal of a Christian woman in a blasphemy case. 

      Khadim Hussain Rizvi, chief of Tehreek-e-Labbaik Pakistan (TLP), and three other party leaders were charged on Saturday for making incendiary remarks against the judiciary and military chief after Aasia Bibi was acquitted of blasphemy by the Supreme Court.

      “Today we have decided to take legal action against the TLP leadership,” Pakistan’s Information Minister Fawad Chaudhry told reporters.

      “All those who were directly involved in destroying property, who misbehaved with women, who set fire to buses, are being charged under laws of terrorism at different police stations,” he said, adding that more than 3,000 people had been arrested in connection with the TLP protests.

      Rizvi, along with several other TLP leaders, was detained on November 24 after police launched a crackdown on hundreds of his supporters in Punjab province and the port city of Karachi.

      Thousands of demonstrators, rallied by TLP, had blocked major roads, burning cars and buses last month, as they called for Bibi’s execution to be carried out.

      The chaos followed a landmark verdict which saw Pakistan’s Supreme Court overturn Bibi’s death penalty and ordered her release after eight years in jail.

      During the violent protests, one of the TLP co-founders, Afzal Qadri, called for mutiny against the powerful army chief, General Qamar Javed Bajwa, murder of the Supreme Court judges who acquitted Bibi, and branded Prime Minister Imran Khan as a “son of Jews”.

      ‘Life imprisonment’

      Information Minister Chaudhry said Qadri was also charged over terrorism and sedition, along with senior TLP leaders Inyatul Haq Shah and Hafiz Farooqul Hassan.

      “Sedition has a sentence of life imprisonment, they can face life imprisonment. All the charges will be submitted before the courts,” Chaudhry said.

      Saturday’s move represents a hardening of the authorities’ stance towards the group, which in late 2017 had also paralysed the capital, Islamabad, for several weeks and clashed with the police in deadly protests.

      The TLP, whose main focus is protecting Pakistan’s draconian blasphemy laws, had been calling for Bibi to be executed after she was acquitted.

      Bibi, 53, was accused by two Muslim women of having insulted Prophet Muhammad and the Quran during an argument sparked by their refusal to drink water from the same vessel as her in 2009.

      She was convicted and sentenced to death by a trial court in 2010, with the Lahore High Court upholding her conviction four years later. She was finally acquitted last month.

      Bibi’s husband, fearing for his family’s safety, has pleaded for international help to leave the country.

      Blasphemy against Islam and its Prophet is a sensitive subject in Pakistan, where the crime can carry a compulsory death sentence.

      Increasingly, blasphemy accusations have resulted in mob lynchings and extrajudicial murders. An Al Jazeera tally says at least 74 such killings have taken place in Pakistan since 1990.


      Inside Story

      Pakistan protests: How powerful are religious groups?

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      Pakistan rupee hits record low against US dollar

      Pakistan struggles with chronic inflation as it burns through its dwindling foreign currency reserves.

        Pakistan’s rupee has plunged almost five percent to a record low after what appeared to be a sixth devaluation by the central bank in the past year as the country struggles with an acute balance of payment crisis.

        The unit sank to 143 rupees against the dollar on Friday, just a day after Prime Minister Imran Khan’s government celebrated 100 days in office with a televised conference boasting of its achievements.

        The State Bank of Pakistan has indirectly devalued the state-managed unit several times already as it tries to narrow a huge balance of payments deficit.

        But traders are concerned that neither Khan nor his Finance Minister Asad Umar laid out a comprehensive plan to address the country’s economic woes more than a week after negotiations with the International Monetary Fund ended without a much-needed bailout agreement.

        The former cricketer has launched a highly publicised austerity drive since being sworn in, including auctioning off government-owned luxury vehicles and buffaloes, in addition to seeking loans from “friendly countries” and making overtures to the IMF.

        “The market was disappointed to see that there was no clear-cut direction of the government regarding raising loans from IMF or taxation policies for the rest of its term,” said Hamad Iqbal, director of research at Elixir Securities.

        IMF talks ongoing 

        The rupee has lost about a third of its value since the start of the year as Pakistan struggles with chronic inflation as it burns through its dwindling foreign currency reserves, which are down around 40 percent this year.

        Pakistan secured $6bn in funding from Saudi Arabia and struck a 12-month deal for a cash lifeline during Khan’s visit to the kingdom in October.

        Despite the pledges, the ministry of finance said Pakistan would still seek broader IMF support for the government’s long-term economic planning.

        With talks with the IMF still ongoing, Khan’s new government has been searching for ways to rally its struggling economy. Pakistan has been a regular borrower from the IMF since the 1980s.

        Islamabad has received billions of dollars in Chinese loans to finance ambitious infrastructure projects, but the United States – one of the IMF’s biggest donors – has raised fears that Pakistan could use any bailout money to repay its debts to China.

        The IMF and the World Bank forecasts suggest the Pakistani economy is likely to grow by 4-4.5 percent for the fiscal year ending June 2019 compared to the last year growth of 5.8 percent.

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        Toyota to buy out PSA stake in joint Czech factory

        PARIS (Reuters) – Toyota (7203.T) has agreed to buy out PSA Group’s (PEUP.PA) stake in a jointly-managed Czech Republic factory specializing in the production of small cars, the companies said on Friday.

        The French firm will also supply another model of compact van for its Japanese partner from its Vigo plant in Spain as of 2019, they added in a statement.

        Toyota will take full ownership of the Czech plant of Kolin from January 2021, and the factory will continue to produce “the current generation” of compact cars for the two companies.

        It currently turns out Peugeot 108, Citroen C1 and Toyota Argo models.

        “Toyota intends to continue production and employment in the future at the Kolin plant,” the companies said, without disclosing financial details.

        PSA already assembles vans for Toyota at its Sevelnord plant in northern France.

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        Explainer: What underlies U.S.-China tensions ahead of crucial G20 meeting?

        WASHINGTON (Reuters) – U.S. President Donald Trump and Chinese President Xi Jinping are expected to meet on the sidelines of the G20 summit in Argentina this week for what some see as the most important meeting in years between the leaders of the world’s two largest economies.

        After months of bitter bickering between their governments over trade and security that has raised questions about the very future of a complex but economically pivotal relationship, the two leaders took a step back from the edge with an ice-breaking telephone call early this month.

        They expressed optimism about resolving their damaging trade war ahead of the meeting on Saturday, but there have been few tangible signs of progress. They will be in Buenos Aires for the summit of the leaders of the 20 major economies.

        Even so, differences among Trump’s top advisers over China policy and his personal unpredictability and fondness for headline-grabbing moments mean it remains anyone’s guess what the Trump-Xi meeting might bring.

        WHAT CAUSED THE TRADE WAR?

        Trump railed against the massive U.S. trade deficit with China during his 2016 election campaign and after a year in office, with no sign of the gap narrowing, the U.S. president attacked the issue head-on. Trump has imposed tariffs on $250 billion worth of Chinese imports to force concessions on a list of demands that would fundamentally change the two countries’ terms of trade. China has responded with tariffs of its own on U.S. goods, targeting farm states that are an important part of Trump’s political base.

        Trump has threatened tariffs on another $267 billion worth of Chinese products, including cell phones, computers, clothing and footwear. And 10 percent tariffs on $200 billion of Chinese goods are scheduled to rise to a more prohibitive 25 percent on Jan. 1, 2019 unless a truce is agreed.

        Washington wants Beijing to act to reduce a $375 billion trade surplus by opening its economy to foreign competition, increasing protection for U.S. intellectual property, ending joint venture requirements that lead to technology transfers and cutting subsidies to state-owned industries.

        It particularly wants to prevent exports to China of advanced technologies in areas such as artificial intelligence and robotics and has tightened rules on foreign investment in 27 sensitive sectors to stop Chinese deals.

        The U.S. Justice Department recently charged China state-owned Fujian Jinhua Integrated Circuit Co with conspiring to steal trade secrets in what is expected to be the first of several similar cases to attempt to stop the flow of intellectual property into China.

        U.S. officials say China has delivered a written response to U.S. demands for wide-ranging trade reforms, but they remain doubtful this will be enough to bring about a breakthrough when Xi and Trump meet.

        HOW SERIOUS IS THE U.S.-CHINA SECURITY RIVALRY?

        In the past 20 years China has grown rapidly to become arguably Washington’s biggest security rival, with defense spending that now far outstrips former Cold War rival Russia. A hundred years after the end of World War One, some academics have even warned of another “Thucydides Trap” – a theory that sees a risk of rivalry between a rising and an established power spiraling into open conflict.

        Recent years have seen a steady uptick in tensions, punctuated by U.S. naval and air patrols challenging China’s extensive claims in the South China Sea and U.S. warship movements through the highly sensitive Taiwan Strait.

        While the two sides have taken care to maintain military-to-military contacts, close encounters have raised fears that an accidental clash could escalate into an unexpected conflict – particularly over Taiwan, which Beijing considers a wayward province and a “red line” not to be crossed.

        Trump added new uncertainty when he said the United States would quit a Cold-War era treaty with Russia that has prevented Washington from stationing ground-based intermediate-range missiles in Asia as well as Europe.

        In what was billed as a major policy speech on Oct. 4, U.S. Vice President Mike Pence escalated Washington’s trade-driven pressure campaign, highlighting Chinese military and industrial espionage activity and accusing China of “malign” efforts to undermine Trump in the Nov. 6 mid-term congressional elections. He offered no concrete evidence of that.

        IS THE CURRENT TREND REVERSIBLE?

        White House insiders say there remain substantial differences within the Trump administration over how far to push China.

        This division groups anti-China hardliner and trade adviser Peter Navarro, U.S. Trade Representative Robert Lighthizer and those who favor a complete reevaluation of the relationship on one side. On the other are pragmatists led by White House chief economist Larry Kudlow and Treasury Secretary Steven Mnuchin, concerned about the harm deepening friction could do to the U.S. economy and markets.

        In Trump’s “America First” rhetoric and persistent criticism of the damaging effect he says Chinese trade practices have on America, he has appeared to favor Navarro’s school of thought.

        But he has also shown himself very aware of the immediately positive effects any indication of an improved mood with Beijing can have on U.S. financial markets and his ratings for handling of the economy at a time when he is under fire on other domestic fronts.

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