MNI EXCLUSIVE: China Advisors See US Deal Surviving Tensions

-China Advisors See U.S. Trade Deal Surviving

-China Sees U.S. Capital Ban On Chinese Companies Unlikely

-Concern In Beijing As Europe Relations Fray

     BEIJING(MNI) - The U.S. may target some of China's industries such as

medical equipment suppliers with increased tariffs and other measures, Chinese

policy advisors and other sources in Beijing believe, but they told MNI that

President Donald Trump will not put the two countries' Phase 1 trade deal in

jeopardy even as bilateral relations hit their lowest point in years.

     Chinese officials are also concerned by signs that European nations are

aligning themselves with the U.S. and adopting a critical approach to China's

handling of coronavirus, advisors said, noting that this augured ill for any

hopes of enhanced trade links with the European Union in the near term.

     U.S. moves are unlikely to cause much economic damage, and any Chinese

response will be calibrated on a case-by-case basis, said a source who regularly

meets senior officials.

     "Raising tariffs can't hurt China in this situation. The export sector has

already been hurt badly because of plunging external demand," said the source,

while acknowledging that the U.S. may move to repatriate some of its medical

supply chain.

     Sino-U.S. relations are the worst in decades, according to Lv Xiang, a

research fellow of the Institute of American Studies at the Chinese Academy of

Social Sciences, speaking after Chinese state media reacted furiously to U.S.

Secretary of State Mike Pompeo's claim that the coronavirus came from a

laboratory in Wuhan. Diplomatic rhetoric is likely to deteriorate until at least

the U.S. elections in November, according to both the source and to Shi Yinhong,

an international relations professor at China's Renmin University.

     But, while a Phase 2 deal now looks unlikely, Shi and other advisors saw

little probability that Trump would ditch the hard-won Phase 2 trade accord.

     "Trump still considers the Phase 1 trade deal a big achievement and he

still needs to show it off in the run-up to the general election in November,"

said Shi, adding: "the deal is also a commitment made by the Chinese government,

so the Chinese government won't take additional step to dismantle it."

     --CAPITAL MARKET ACCESS

     U.S. officials have floated the idea of blocking Chinese companies' access

to U.S. capital markets, with the head of the Securities and Exchange Commission

warning about the risk of investing in firms lacking transparency, but Lv and

the source saw any such restrictions only as a tail risk.

     "The worst-case scenario would be that Chinese companies delist from the

U.S. market and relist themselves in Hong Kong," the source said.

     The SEC warning came after news of an accounting fraud at China's

Nasdaq-traded Luckin Coffee. The Chinese government surprised investors by

announcing an investigation before any move by U.S. authorities.

     "I think the bottom line for the Chinese government is that they don't want

U.S. law enforcement to show up in China, which will give rise to disputes on

sovereignty rights. So the government took action first," the source said.

     Relations with Europe are also being tested by the fallout from

coronavirus, with Shi saying that the EU's pre-pandemic ambitions for a more

integrated business relationship may now prove to be challenging.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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